The Global Business Handbook

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THe Global Business Handbook

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The Global Business Handbook The Eight Dimensions of International Management

Edited by David J. Newlands and Mark J. Hooper

© David Newlands and Mark J. Hooper 2009 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise without the prior permission of the publisher. David Newlands and Mark J. Hooper have asserted their moral right under the Copyright, Designs and Patents Act, 1988, to be identified as the editors of this work. Published by Gower Publishing Limited Gower Publishing Company Wey Court East Suite 420 Union Road 101 Cherry Street Farnham Burlington, VT 05401-4405 Surrey GU9 7PT USA England www.gowerpublishing.com British Library Cataloguing in Publication Data The global business handbook : the eight dimensions of international management 1. International business enterprises - Management I. Newlands, David J. II. Hooper, Mark J. 658'.049 ISBN-13: 9780566087479 (hbk) Library of Congress Cataloging-in-Publication Data The global business handbook : the eight dimensions of international management / [edited] by David Newlands and Mark J. Hooper. p. cm. ISBN 978-0-566-08747-9 1. International business enterprises--Management. 2. International trade. I. Newlands, David J. II. Hooper, Mark J. HD62.4.G536 2008 658'.049--dc22 2008031193 ISBN-9780754681373 (ebk) II

Contents List of Figures List of Tables Contributors Acknowledgements The Eight Dimensions of International Business David J. Newlands and Mark J. Hooper

ix xi xiii xxi xxiii

Dimension 1: International Perspectives 1

International Business – Operating Abroad David Trigg and Marie C. Trigg

3

2

International Strategy Management Mark J. Hooper

17

3

International Business Ethics David Kimber and Fran Siemensma

29

Dimension 2: Relationship Management 4

Inter-Firm Collaboration and Partnering: A Key Competence to Satisfy Demand Maria Veludo

5

International Negotiation Brooks C. Holtom

43 69

Dimension 3: Supply Chain Management 6 Social and Environmental Management Mark J. Hooper with Alkiviadis Tromaras 7

Managing Mergers and Acquisitions Zoltán Antal-Mokos

89 123

8 Supply Chain Management Douglas MacBeth

133

9

147

International Purchasing Management David J. Newlands

vi 10

The Global Business Handbook Reverse Logistics Isabel Fernández

159

Dimension 4: Regional and Country Specific Differences 11

Human Resource Management’s Relationship to Company Performance Nada Zupan

175

12

International Human Resource Management Hedley Malloch

191

13

Employment Relations in a Global Networked Economy Sandra Jones

211

14

Human Resources Management Practices within Japanese Companies Peter Firkola

227

Dimension 5: Marketing and Sales 15

Doing Business in Western Europe Simon A. Mercado

243

16

Doing Business in NAFTA Coral R. Snodgrass

265

17

Direct Marketing – A Global Perspective Tim Lyons

277

18 Retail Merchandising and Sales Promotions Mayo de Juan Vigaray and Beyza Gültekin

289

19 Services Marketing: An Overview and Relational Approach of the B2B Setting Ruben Chumpitaz and Nicholas G. Paparoidamis

307

Dimension 6: Cost Management 20 Strategic Cost Management Roby B. Sawyers

325

21 Strategic Management of Not-for-Profit Organizations Steve Molloy

337

Dimension 7: Innovation and Quality 22

The Quality Management Situation – An Introduction Kevin Laframboise

353

Contents

vii

23

Technology and Innovation Management David J. Newlands

369

24

Managing Knowledge Strategically Sandra Jones

397

25

Tacit Knowledge and Implicit Learning Keith Dawes

411

Dimension 8: Business Transformation 26 Service Operations Management Erkan Bayraktar

431

27

451

International Transportation, Shipping and Logistics Phil Scott

28 Supplier Development David J. Newlands 29

471



International Entrepreneurship: Developing Cross-cultural Entrepreneurial Competence Olga Muzychenko

30

Change Management – Realizing the Transformation David J. Newlands

535

31

International Business Training using a Supply Chain Game David J. Newlands

557

Index

519

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List of Figures 0.1 The eight dimensions of international management 1.1 Typical evolution of multinational corporation 2.1 The relationship of change forces to organizational actions 2.2 Environmental forces and strategic reaction 2.3 Strategic commitment options available to companies 2.4 The evolution of RTAs 1948–2006 3.1 A decision-making diagram 3.2 A stakeholder map 3.3 A sustainability diagram 4.1 A conceptual framework to analyse inter-firm collaboration in industrial markets 4.2 Contextual factors framework 5.1 Dual concerns model 5.2 Used textbook negotiation (a) 5.3 Used textbook negotiation (b) 5.4 Used textbook negotiation (c) 6.1 The increase in CO2 emissions from 1751 to 2003 6.2 Air pollution in Hong Kong observed in February 2008 6.3 Aeroplane condensation trails across the English Channel 6.4 The cycle of acidic compounds and acid rain types 8.1 Organizational tasks 8.2 Logistics hub and spoke 8.3 International Trade INCO terms 8.4 Modified Kraljic portfolio 10.1 Total costs of e-returns, 1999–2003 10.2 Value recovery activities 11.1 Model of high performance 11.2 Types of employment relationships 11.3 Main HRM issues in gaining competitive advantage through people 11.4 HRM approaches matrix 11.5 HR strategy formulation 13.1 Industrial relations model 13.2 Human resource model 13.3 Mutual gains/partnership model 13.4 Network framework 17.1 The impact of the global environment on direct marketing – company 20.1 The value chain 20.2 The cost and process dimensions of activity-based costing 20.3 The balanced scorecard approach to performance measurement 20.4 Contemporary view of the costs of quality 21.1 Competitive forces in industry 22.1 Supply chain process

xxiv 11 21 23 24 27 36 38 39 57 60 73 77 77 78 93 98 99 101 136 137 139 144 166 167 177 178 179 182 185 212 213 214 215 280 328 331 333 335 340 359

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22.2 Process management 22.3 Cause and effect diagram 22.4 Pareto chart 22.5 Scatter diagram 23.1 Key performance metric improvement over time – satisfaction, success and failure adapted 23.2 Greenfield’s sequential curvilinear performance improvement model 23.3 Copying designs 23.4 Design leadership 23.5 Traditional product development 23.6 Concurrent engineering 23.7 Theoretical product life cycle 23.8 Model T product life cycle 24.1 Community of practice process 26.1 Relationship between services employment and national income 27.1 A schematic of a simplified supply chain as a total system 27.2 The use of satellite communications to support information linkages required between manufacturers and distributors 27.3 Costs and benefits model 28.1 The need for change 28.2 Ford Motor Company’s expenditure on minority suppliers (1991–2004) 28.3 A 2×2 matrix of high and low awareness and competence. 28.4 Overlay of hypothetical facilitating and facilitator preparation profiles on the managerial grid 28.5 A depiction of Barrington’s proposed hierarchy 29.1 Interrelationship between culture, entrepreneurial competencies and entrepreneurial tasks and the role of cross-cultural entrepreneurial competence 29.2 Cross-cultural entrepreneurial competence 30.1 Awareness and capability matrix 31.1 A representation of a supply chain 31.2 Stages of developing integrated supply chain 31.3 Management planning using MRP to push materials through a supply chain

360 363 364 364 374 375 377 378 381 382 387 387 405 433 455 459 465 480 487 498 506 507 527 528 547 559 563 565

List of Tables 2.1 The economic power of MNCs 2.2 Example SWOT analysis for Apple Computers and Cannon 2.3 A comparison of cultural values 3.1 Petrick and Quinn’s business ethics orientation model 4.1 A framework for understanding partnering 6.1 Data from ICEER from 2005 in UK 10.1 Scope and treatment rates: Art. 7 of the WEEE Directive 13.1 Questions with ‘yes’ and ‘no’ frames 15.1 National population and gross domestic product (GDP) in the WE20, 2006 15.2 Gross domestic product per capita in the WE20 ($PPP), 2005 15.3 GDP growth rates (year-on-year) in the WE20, 1996–2006 15.4 Applied VAT rates (%) in the WE20, as at 1 January 2006 15.5 Corporation tax rates (%) in the WE20, as at 1 January 2006 18.1 International Mother’s and Father’s Day dates used by retailers to remind consumers that time passes 26.1 Facility location issues based on service types 29.1 Task specific elements of cross-cultural entrepreneurial competence and corresponding competence clusters

18 20 26 30 49 111 163 219 250 251 252 253 254 290 437 529

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Contributors The Editors Dr. David J. Newlands has worked in various industrial positions, from his apprenticeship through sales, system calibration, test engineering, to lecturing and research into supply chain issues. He gained a BTEC and HNC in engineering while an apprentice, B.Eng. (Hons) in Manufacturing Systems Engineering and his PhD in developing supply chain methodologies that focused on supplier development. Dr Newlands is Senior Assistant Professor of Operations and Industrial Management at the Institute d’Économie Scientifique et Gestion. IÉSEG School of Management is part of the Catholic University of Lille, North France. Contact: [email protected]; [email protected] Telephone +33 320 54 58 92 Dr Mark J. Hooper is a Senior Lecturer in the Faculty of Engineering and Computing at Coventry University. In addition to his teaching in the UK, he has lectured in America, Hong Kong, China and India. He is an active researcher in a diverse range of organizational subjects which currently include innovation cluster dynamics, privatization in the UAE and human-centred change paradigms. He is a visiting professor of Operations Management at IÉSEG where he teaches the core subjects of Change and Environmental Management. Prior to entering academia he worked in a number of organizations centred in the defence and aerospace industries. Contact: [email protected] Telephone +44 24 7688 7688

The Contributors Dr Zoltán Antal-Mokos is Associate Professor of Strategy and Executive MBA programme director at the European School of Management and Technology, Berlin, Germany (www.esmt. org). Prior to joining ESMT, he held the McKinsey & Co. Chair in Strategy at the Budapest University of Economic Sciences. He completed his PhD at London Business School. The results of his PhD research were published by Cambridge University Press. Professor AntalMokos has published extensively and run successful courses on corporate strategy, privatization, mergers and acquisitions, and strategic alliances, and consulted international corporations in various business sectors across Europe. Contact: [email protected] Dr Erkan Bayraktar earned his PhD in Industrial Engineering from the University of Iowa. After working several years in industry as a consultant, he has been lecturing in a number of business and engineering schools in the area of operations management, supply chain management, quantitative methods and re-engineering. Dr Bayraktar currently serves as an associate professor of Operations Management at Bahcesehir University, Istanbul, Turkey.

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His principal research areas include supply chain management, lean production, layout studies and re-engineering. He has published in several academic journals including the International Journal of Production Economics and Industrial Management and Data Systems, among others. He is a member of INFORMS, AOM and AIB. Contact: [email protected] Dr Chumpitaz is Full Professor and Head of the Department of Marketing at the IÉSEG School of Management at the Catholic University of Lille. He earned his MBA in 1995 and his PhD in 1998, both from the Louvain School of Management at the Catholic University of Louvain in Belgium. Dr Chumpitaz is currently a professor of Marketing and has taught such courses as Strategic Marketing and Company Observation, Marketing Research Seminar, Multivariate Data Analysis and Forecasting Methods for Marketing. His teaching experience includes executive and MBA programmes in Argentina, Belgium, France, Paraguay, Peru, Spain and Uruguay. Prior to entering academia, Dr Chumpitaz worked for several years in management in the telecommunication industrial sector and for almost fifteen years he has served as an analytical consultant for marketing research projects and agencies. Dr Chumpitaz’s research focuses on customer satisfaction, brand loyalty market orientation and service recovery. His research has been published in academic and professional journals such as the Managing Service Quality, International Review of Retail, Distribution and Consumer Research, European Business Forum, European Journal of Marketing and Recherche et Application en Marketing. Contact: [email protected] Dr Keith Dawes is a psychologist and management educator in NSW Australia. He works closely with senior management in several prominent Australian organizations on strategic planning and organizational development. He currently teaches university courses in the Management of Innovation and Technical Change, Managing People and Organizations, Introduction to Contemporary Business Practice and Strategic Planning for Business Coaches. His research interest is in Tacit Knowledge. He teaches the course Tacit Knowledge and Implicit Learning for IÉSEG in Lille and conducts research on Tacit Knowledge and Innovation in Australian organizations. Contact: [email protected] Dr Isabel Fernández has been professor of Logistics and Production Organization at the Engineering University in Oviedo (Spain) since 1997. Professor Fernández earned her PhD in Reverse Logistics at both the University of Vaasa (Finland) and the University of Oviedo. She also earned the title of European Doctor. Prof. Fernández obtained an MSc from the University of Vasque Country and MBA from University of Oviedo. Her major research interests are logistics management, reverse logistics, cost analysis, inventory control and time series analysis. She has published over fifty articles in academic journals and conference proceedings and has participated in several research projects and books. She acts as external referee for several scientific journals and is a member of FAL (Asturian Logistics Foundation), ADINGOR (Association of Production Organization Engineers) and board member of the International Society for Productivity and Quality Research. She has consulting experience in private companies. Contact: [email protected]

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Dr Peter Firkola is an Associate Professor of International Management and Director of the Hokkaido University Short-Term Exchange Program at the International Student Center, Hokkaido University in Sapporo, Japan. He received his PhD from the Graduate School of Economics and Business Administration at Hokkaido University. In addition, he received his MBA specializing in International Business at McMaster University in Canada. His research focuses on human resource management practices in Japanese organizations, career development practices and cross-cultural management, and he has published several articles in these areas. Contact: [email protected] Dr Sandra Jones is the Professor of Employment Relations at RMIT. Professor Jones earned a PhD and is a renowned international researcher in the fields of employment relations and knowledge strategy. Professor Jones is the recipient of an Australian National Award Citation for Outstanding Contribution to Student Learning for her design and development of innovative Virtual Situated Learning Environments. Professor Jones has been invited as an international expert to teach and research in many countries including France, Canada and the UK, as well as Hong Kong, Malaysia and Singapore. Contact: [email protected] Dr María D. De Juan has a PhD in Marketing. She is an assistant professor in Marketing at the University of Alicante (Spain) and a visiting assistant professor at IÉSEG School of Management (Institute d’Économie Scientifique et Gestion, France), one of the top ranking French Grande École (French Elitist University). Dr De Juan has been a lecturer at the University of Florida (USA), Southampton Business School SSU (Southampton Solent University, UK) and Spanish Business Schools including ESIC (Madrid) and ESADE (Barcelona). She is the author of three books in Spanish: Shopping Centre Attraction toward Consumers, Sales Promotions and Channels and Retailing: Commercial Distribution in Practice. She has published articles about retailing and consumer behaviour in several journals and edited books including the Journal of the Academy of Marketing Science and the Journal of Consumer Psychology. Her research focuses on consumer behaviour, retailing, merchandising and store patronage. Contact: [email protected] Dr Brooks C. Holtom is an Associate Professor of Management at McDonough School of Business, Georgetown University, USA. Dr Holtom’s recent publications on negotiation have appeared in Harvard University’s Negotiation Journal as well as the International Journal of Conflict Management, the Journal of Management Education and Decision Sciences Journal of Innovative Education. He was named the 2005 Ascendant Scholar of the Year for the Western Academy of Management and is a multiple-time recipient of the Professor of the Year award for the Georgetown University Executive Masters of Leadership Program, where he teaches International Negotiation. He has also served as a consultant to many organizations including Capital One, Citibank, Nordstrom, NorthWestern Mutual, POSCO, Rolls Royce, Sprint/Nextel, US Chamber of Commerce and the World Bank. Contact: [email protected] Dr David Kimber is visiting Professor at IÉSEG School of Management, France and at the Indian Institute of Management – Bangalore in India. He teaches courses in International Business Ethics, International Corporate Governance, Ethics and Governance. He was the former associate dean and director of postgraduate studies and joint programme coordinator

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for the Doctor of Business Administration at RMIT’s Business Faculty. With Fran Siemensma, his teaching and research interests are in the areas of business ethics, corporate governance and citizenship, international alliances, cross-cultural studies, business/society relationships and values in management and leadership. He has taught at universities and colleges in China, Malaysia, Singapore, France, India, Bangladesh and Australia. He has undertaken research and published papers with Fran Siemensma on corporate governance and social responsibility, values in management and leadership, ethics and integrity systems. Contact: [email protected]; [email protected] Dr Kevin Laframboise has been a recognized and successful educator for several decades. A long-standing member of the American Society for Quality, he was awarded an MSc and a PhD in Quality Management from Concordia University in Montreal, Canada. He has presented at many highly rated international business conferences. He has also authored or co-authored articles in several business publications including the European Journal of Operational Research, International Journal of Intelligent Information Technologies, International Journal of Enterprise Information Systems, International Journal of Knowledge Management, International Journal of Information and Operations Management Education, Journal of Supply Chain Management and Leadership Quarterly. Contact: [email protected] Tim Lyons is an experienced senior manager who has worked extensively in the Asia Pacific region. His primary background is in sales and marketing in the consumer industries, with additional expertise in finance and banking and TV media. Since the early 1990s he has gained additional experience in higher education at undergraduate and postgraduate levels, both in Australia and internationally. His academic work has taken him to Singapore, Hong Kong, Vietnam, China, Australia and France. He is currently an Assistant Professor of Marketing at the International School of Management (ISM) in Paris (www.ism.edu) and Executive Director of Chinese-based consultancy firm, Manage China (www.managechina.com). His research interests are in SMEs and online marketing. Contact: [email protected] Douglas K. Macbeth is full Professor of Purchasing and Supply Management in the School of Management. University of Southampton, UK. From 1994, Professor MacBeth was CIPS/ SCMG Ltd Professor of Supply Chain Management at the University of Glasgow and he is the founding Director of SCMG Ltd, a consulting company specializing in Supply Chain Management, Procurement and Logistics. This business was spun out of the University of Glasgow in 1990. His research interests include supply chain management and strategy, applications of change management and chaos theory to supply chains and logistics and the globalization of supply chains. He is Associate Editor of the European Management Journal. Contact: [email protected] Dr Hedley Malloch, PhD, MSc (Administrative Sciences), BSc (Econs) is Professor of Management at IÉSEG School of Management, the Catholic University of Lille, France, where he teaches international HRM and strategy. Previously he taught in business schools in the UK, Turkey and Cyprus. He has worked professionally in many other countries including Poland and The Netherlands. His research interests include international vocational education and training, cross-cultural leadership styles and HRM in firms operated by monastic

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orders. He has published widely in many journals including International Journal of Human Resource Management, Personnel Review and the Journal of Management Inquiry. He serves on the Management and Editorial Boards of Personnel Review, Human Resource Development International and the Journal of Vocational Education and Training. Contact: [email protected] Dr Simon A. Mercado is Head of Strategy and International Business at Nottingham Business School (NBS), Nottingham Trent University (NTU). He holds a PhD in International Political Economics and is author of various papers and principal author (with R. Welford and K. Prescott) of European Business, 5th edition (Harlow: Pearson Education Ltd, 2007). Dr Mercado has professional and industrial experience in the fields of journalism and food marketing. He is an active consultant on HE internationalization. Contact: [email protected] Dr Steve Molloy is an Associate Professor of Management at the Wehle School of Business, Canisius College in Buffalo, New York. Dr Molloy earned his PhD in Business Strategy and MIS from Indiana University. His research interests focus on entrepreneurship, not for profit organizations and the strategic impacts of information technology. Dr Molloy currently teaches Strategic Management of Not-for-Profit Organizations as a visiting Professor at IÉSEG School of Management. Contact: [email protected] Olga Muzychenko is a lecturer at the University of Adelaide Business School. Her areas of expertise and research interests span across Cross-cultural Management, Entrepreneurship and International Business. Her past research looked at various aspects of internationalization of small and medium-sized enterprises, entrepreneurship education and training and crosscultural dimensions of organizational behaviour. After commencing her academic career she has retained a link with the business community, acting as a consultant to small and mediumsized enterprises in Europe and Australia as well as the Enterprise Development Section of the International Labor Organization (ILO). Contact: [email protected] Dr Nicholas G. Paparoidamis earned his PhD in 2001 from Cardiff Business School, Wales. He is an Associate Professor of Marketing at the IÉSEG School of Management, Catholic University of Lille. Dr Paparoidamis’ research curriculum includes a number of publications in top American and European marketing journals such as the International Business Review, Industrial Marketing Management, European Journal of Marketing, Managing Service Quality and Management Decision. He has participated in many major marketing conferences worldwide and he is a member of a number of distinguished marketing organizations including the Academy of Marketing Science, the European Marketing Academy, the American Marketing Association and the French Marketing Association. He also worked for a number of years as a marketing consultant and research and development expert at EFG Eurobank S.and European Dynamics SA in Greece. Contact: [email protected] Dr J. Phillip Scott is currently Deputy Dean of the Graduate School of Business and Co-Director of the Centre for Supply Chain Research at the University of Wollongong, Australia. Prior to accepting this position, Dr Scott was the Head of the School of Management and Marketing

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and Deputy Director of the Graduate School of Business and Professional Development at the University of Wollongong. He has been teaching in Australia since the early 1990s. Contact: [email protected] Dr Fran Siemensma is visiting Professor at IÉSEG School of Management, France and at the Indian Institute of Management – Bangalore in India. She teaches courses in International Business Ethics, International Corporate Governance, Ethics and Governance and was a faculty member at the School of Management at Victoria University. With David Kimber, her teaching and research interests are in the areas of business ethics, corporate governance and citizenship, international alliances, cross-cultural studies, business/society relationships and values in management and leadership. She has taught at universities and colleges in China, Malaysia, Singapore, France, India, Bangladesh and Australia. She has undertaken research and published papers with David Kimber on corporate governance and social responsibility, values in management and leadership, ethics and integrity systems. Dr Coral R. Snodgrass is a visiting professor at IÉSEG School of Management, Catholic University of Lille, France. She earned her PhD from the University of Pittsburgh in 1984. She is a professor of International Business at Canisius College in Buffalo, NY where she is also the Director of the International Business Program. She specializes in the teaching of International Strategy with an emphasis on business in North America. Most recently she has been studying the impact of increased security measures at the Canada–US border on cross-border trade. This project, funded by the Canadian government, has concentrated on the functioning of cross-border supply chains that support the most vibrant bilateral trade relationship in the world. Professor Snodgrass is the faculty director for student exchanges and study abroad projects. She is presently the Project Director of an Atlantis Grant from the US Department of Education and the European Union which supports EU and US students to complete dual degrees in International Business at Canisius College, the University of Strasbourg and the University of Antwerp. she leads groups of students on study tours of Mexico and the European Union. Contact: [email protected] David Trigg has been an academic for a number of years, working in the fields of international business and strategy. He has taught at graduate and undergraduate levels in Australia – his home country – as well as in Hong Kong, China, Thailand, USA and France. He currently has an adjunct position with the University of Ballarat. He also conducts a management consultancy practice in the area of management training to international business. His research interests lie in governance issues of multinational companies and published widely. He is a board member of a number of commercial organizations. He has held the position of Board President. His most recent appointment is to the education board of a national agribusiness company. Contact: [email protected] Marie C. Trigg is a member of the postgraduate Deakin Business School in Australia and the Faculty Chair of International Business Management and Program Director of the China International Study Program. She has taught in both graduate and undergraduate programmes in many parts of the world including the USA, Thailand, Hong Kong, China, The Netherlands and France. While she has published in the areas of corporate and national culture and experiential learning, she is best known for the two editions International Business: A

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Managerial Perspective, which she co-authored with a colleague. The second edition was awarded the prestigious Australian tertiary textbook of the year 2002. Her theoretical background is balanced by her practical involvement the breeding of stud cattle and her importing and exporting of genetic material. Contact: [email protected] Dr Alkiviadis Tromaras originates from Thessaloniki, Greece. He studied Aerospace Manufacturing Engineering at the University of the West of England and obtained a Masters degree in Competitive Manufacturing at Coventry University. He was awarded a PhD from Coventry University for studying the application of Stakeholder Theory in Environmental Management related to the Aerospace Industry. He currently works on environmental matters at Cummins UK. Dr Maria de Lurdes Martinez Veludo holds a PhD in Management from the University of Glasgow with a specialization in Partnering Relationships within a Multinational and Subsidiary Context. Dr Veludo’s academic experience as a lecturer, programme designer and researcher is extensive. She teaches supply chain management courses in postgraduate and executive programs at Groupe ESC Rouen, where she is also responsible for the design and implementation of Masters programmes on supply chain management. Additionally, she has taught purchasing, supplier development and business relationship management in various countries as a visiting professor. Dr Veludo has led research on the automotive and health industries and services logistics. Her international research projects cover areas such as sustainable purchasing, reverse logistics, traceability, waste management, fair trade and intermodal transportation. Contact: [email protected] Dr Nada Zupan is an associate professor at the Faculty of Economics, University of Ljubljana, department of Management and Organization. She completed her Master’s studies in 1990 at Cornell University in the field of Organizational Behaviour and her doctoral studies in 1999 at the Faculty of Economics in Ljubljana in the field of Human Resource Management. Her main research interests include strategic HRM, performance management and compensation. Besides teaching and research, she is also involved in management training programmes and consulting projects. She has published over forty articles and monographs and she regularly attends international conferences. She is also the vice-president of Slovenian Human Resource Association. Contact: [email protected]

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Acknowledgements This volume would not have been realized without the understanding, foresight and patience of Mr Jonathan Norman, Publisher and Commissioning Editor at Gower Publishing. He brought significant subtlety, many suggestions and a keen eye for detail to this project that was a diamond in the rough. We would like to thank Professor John Saee for helping to assure Mr Norman of the merit of the project and his insistence on quality contributions. We owe a debt of thanks to each of the contributors, both in this volume and those that we had to turn down. In alphabetical order of lead contributors: Zoltan Antol-Mokos, Erkan Bayraktar, Ruben Chumpitaz and Nicolas Paproidamis, Isabel Fenandez, Peter Firkola, Brooks C. Holtom, Sandra Jones, David Kimber and Fran Siemensma, Kevin Laframboise, Tim Lyons, Douglas K. MacBeth, Hedley Malloch, Simon A. Mercado, Steve Molloy, Olga Musychenko, Roby B. Sawyers, Phil Scott, Coral R. Snodgrass, David Trigg and Marie C. Trigg, Maria Lourdes de Veludo, Mayo de Juan Vigaray and Beyza Gültekin and Nada Zupan.

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The Eight Dimensions of International Business David J. Newlands and Mark J. Hooper

There are so many things going on in international business at a global level that it would be impossible to list and describe them all in a single volume. Rather than do so many things an injustice, we will concentrate on the big developments that currently are happening and consider how managers operating in the global business landscape must change what they do to create advantages and remain competitive. Most business schools have functional specialisms known as majors or concentrations. The most usual of these are marketing, finance, operations management and research, information systems, human resource management and audit and managerial control. Students and practitioners tend to specialize in their chosen fields. Some commit to a field prior to higher education study. As a result of taking obligatory courses in each concentration, in Europe it is possible to be a generalist up until the final stages of a Bachelors degree. We as editors have ‘cherry picked’ and invited contributions from academics that have been invited to develop and deliver elective courses at IÉSEG School of Management in Lille, France. The number of electives on offer has developed rapidly since 2005 when 35 courses were run. For academic year 2008–2009 we plan in excess of 200 subjects that deal with specific issues and managerial decision making. Specialist subject titles offered vary greatly with time given to specific issues. In assessing the larger picture, eight dimensions or clusters were identified. These dimensions further enabled other potential electives to be identified, developed and tested by delivering courses. A volume of this size can not possibly cover all aspects of a single subject area or business major. Such an endeavour would require a series of volumes dedicated to each. This bound volume aims to combine the essential knowledge and value add discussions of the contributors into a structured sequence of chapters. We have brought together the ‘need to know’ elements that will support specialists when dealing with issues outside their functional or departmental ‘comfort zone’. We aim to further enhance this selection with online contributions. Introduction This handbook comprises of a collection grouped and sequenced chapters. This volume of contributed chapters directly stems from a set of intensive electives delivered at IÉSEG1 School of Management, Lille and Paris, France. The number of electives has grown organically in recent years as a result of the strategy to identify specific course titles, provide choices to

1 IÉSEG – Institut d’Économie Scientifique et de Gestion. This school is a member of the Grande Ecole system of elitist business schools in France. The course electives are offered as part of the Masters Degrees in Business.

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participants and to fulfil the learning needs of both an international audience and businesses that operate in a global context. Eight dimensions were identified during a strategic skills and needs analysis. A visiting professor programme academic committee then started to set the framework for identifying and commissioning new courses. The framework has been used to identify the mix and subject portfolio appropriate to the industries and sectors of business activity that postgraduate students tend to go into. The team identified that it is important to be aware of the international community. Awareness provides a guide and sense of the difficulties that lie ahead. Knowing and understanding these limitations, business leaders may then create limits and rules of thumb that can help control over enthusiastic, or perhaps rather uncontrolled, endeavours. The chapters in this volume help identify some of the most important ‘show stoppers’ to implementing globalization strategies. Hence, this first edition of the Global Business Handbook has focused on international business and supply chain management. Volumes of this sort can identify the key issues and start to colour-in important details. Reviews that have a wide scope may suffer in depth. Within the boundaries of the chapter working titles, each contributor has selected the most pressing issues that currently affect business managers in today’s global trading environment.

The Eight Dimensions Model We have depicted the eight dimensions identified thus:

Figure 0.1

The eight dimensions of international management

Each of these subject areas represent a significant phase of managerial attention when management is building multinational, international and global enterprises. The design is symbolic of the tradition to build firm foundations and have a strong roof. International perspectives are firstly identified. This asks: Who could we work with? and how do they differ from us? Relationship management is important in order to foster understanding, set expectations, generate trust and negotiate initial agreements. Once the initial introductions and contracts are signed, work needs to be done to set up and design the chains supply of businesses involved. This may start internally and then spread to suppliers; equally, different teams may be charged with improving a specific section and they must trust other teams to do their allotted work too. Managing supply chains starts to forge long-term relationships by coordinating value-added activities for mutual benefit. Supply chains are required to produce goods for market. Supply chain management tends to take the stream toward suppliers.

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Dimension 4 sets out issues of employing staff at home and abroad. Probably the biggest sources of show stoppers or enablers of superior performance are a company’s employees. Growing and establishing both internationally and globally requires companies to understand the relationship between employees and performance, the issues of international human resourcing, the context and processes of different human relations models in use. Japan is perceived by many as a foreign country, with specific cultural and work placed traditions, expectations, customs and norms. Specific differences are identified and contrasts are made with more familiar Western situations. Dimension 5 looks down toward the point of sale; to trade customers or dealers and consumers. Issues relating to doing business within the EU and NAFTA economic regions are discussed. Businesses may target their marketing directly at individuals in order to set up dialogues to identify needs, present solutions and then proceed to negotiations. Equally, businesses may set up front end retailing environments to take advantage of passing trade such as airport terminals and the high street, as well as individuals that make planned purchasing trips. Many of these trips are to buy physical goods, including gift tokens. Services marketing issues round off this dimension. This chapter builds theory around the direct marketing approach and focuses on attitudes and perspectives to intangible services. Dimension 6 sets out issues related to cost management and economic viability of an activity. Many organizations exist that do not have profit as an objective. Hence, their specific issues are treated. Dimension 7 fundamentally is about learning and improving. Emphasis is placed on doing jobs effectively and efficiently, making better products and providing superior services. The final two chapters focus on managing what is known – explicit knowledge, and identifying and recording ideas, perceptions and other cogitations that have yet to be written down and analysed. The first seven dimensions aid in providing a company with its context, contacts, cost structure, chains of linked together companies and processes, and corporate structures. Dimension 8 is operational in nature. These issues focus less on what is and more on what could be. Industries such as retail, banking and financial, transportation, medical and hospitality are examples of service oriented business activity. A large proportion of so-called modern society is based on the provision of services. Emphasis initially is placed on managing services. We need to understand issues of bringing goods made in low cost countries to markets around the world requires international transportation. These activities rely on accurate data to coordinate production and distribution. Where ever companies buy from, they rely on suppliers efforts to improve quality, cost and delivery reliability in order to remain competitive. A review of supplier development is made because few benchmarking, re-engineering and supplier development schemes seem to achieve their expected results. Most of these efforts to improve supply chain performance focus on existing companies that have already been selected by purchasing and categorized as capable, even if they could reduce cost, improve quality and other performance metrics. Building on the explicit and tacit knowledge issues and attempts to help others, some individuals may feel they have the ideas and competitive advantage ‘to go it alone’ and set up their own company to supply goods and services. There are cultural issues that affect intrapreneurs and entrepreneurialism. For example, in China people understand there is little profit in working for someone else. Hence many Chinese create new supplier companies that are micro, small and medium sized enterprises. Supplier development tends to focus on improving against specific key performance indicators. This assumes the environment and competitive forces will remain constant. Taking a step back, we examine questions that define the purpose, identify the risks, thus challenging the justification for making what is produced, providing existing and the way work is done. Change

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management may be the result of autocratic and democratic processes. Specific individuals may be heralded as company saviours, such as Carlos Ghosn at Nissan. Equally, collective behaviour may generate impetus to set new agendas, behavioural norms and expectations. Supply chain games can be used to facilitate learning, aid communication, identify potential strategies and understand effects of potential solutions. A chapter discusses benefits of using live supply chain games versus financial and decision analysis based computer simulations. This enables versions to be intuitively understood that represent mass production, lean manufacturing and agile customization. Products can subtly differ between these modes because supply chains design for manufacture and assembly in their existing supply chains. Changing mode from mass, to lean to agile can require producers to modify designs in order obtain expected benefits.

The Eight Dimensions Dimension 1 – International Perspectives Dimension 1 focuses on the macro level multicultural business environment and the philosophical underpinnings required to sustain ethical business. The aim of the section is to review in what context and why the business exists, how organizations plan their long-term programmes. International Business Ethics reviews what the company will and will not do. Managing the ethical company puts these Dos and Don’ts into context based on many case examples. Organizations in many countries are now legally required to consider environmental management. Chapters 1–3 relate to the context of international business – the external realities and influences that provoke responses by senior management within an organization. Chapters 1 and 2 focus on the reactions and values of management. Particular focus is placed on the validity of decisions, taking responsibility for what is done now, and what will need to be done in the future to rectify or reduce the consequences of what has been done or made. Chapter 1: Visiting Professors David Trigg and Marie C. Trigg introduce international business environmental factors to develop strategies to internationalize a corporation’s activities. Chapter 2: Dr Mark J. Hooper reviews international strategic management that should be considered when working up a plan to operate globally. In Chapter 3: International Business Ethics, Dr David Kimber and Dr Fran Siemensma review a current framework of business ethics. They reflect on philosophical, social, political, and organizational theories and consider their practical application in an international context. As a subject which directly relates to all forms of personal and organizational decision-making, it is a practical and extremely relevant area for current or potential managers who are or wish to work with a multinational corporation or in an international business environment. It is an essential element of business knowledge, one which may help avoid future turmoil as evidenced by recent major corporation collapses in the US and elsewhere. Dimension 2 – Relationship Management Dimension 2 is concerned with conflict management. The chapters introduce best practice negotiations, making contacts, hiring people, motivation, different countries employee’s expectations, supplier’s human resources, etc.

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Chapter 4: Dr Maria Veludo reviews contributions and describes a case study concerning business to business relationship management. Companies may have relationships ranging from traditional adversarial aggressive negotiations through to collaboration on projects and genuine partnering that is considered a basis of world class business. This chapter reviews literature from several fields of research and models a wide range factors relating to inter-firm collaboration and partnering. Clarifications are provided to order the development process of inter-firm collaboration and partnering. This chapter reviews a variety of definitions of inter-firm collaboration and partnering. This provides the reader an idea of the complexity of these concepts. Then it will review main contributions of some theoretical perspectives to the understanding of these topics. These are: the resource based view theory, transaction cost analysis and network theory. The chapter will go on providing a short overview of partnering related issues, including disciplinary perspectives, characteristics and influencing factors. In Chapter 5: International Negotiation, Dr Brooks C. Holtom examines the art and science of international negotiations with the aim of developing negotiation abilities. Three key assumptions are reviewed: first, international negotiation is a comprehensible social process. It is not a mystical process in a black box; it can be analysed, understood and modelled. Second, negotiation is a learnable and teachable skill. Negotiators are made, not born, and skills can be improved and relearned throughout life. Third, change and improvement in negotiating behaviour require a combination of intellectual training and behavioural skill development. The purpose of this chapter is to review the practices and strategies of negotiation skills used in both personal and professional settings. The chapter is designed to provide: 1. an understanding of the decision-making processes that influence negotiation outcomes; 2. applied theoretical frameworks for principled negotiation in the international context; 3. opportunities to develop effective negotiation skills. Dimension 3 – Business-to-Business Coordination Dimension 3 looks at the physical assets involved in delivering products to the major markets of the world. SCM and purchasing are mutually exclusive yet mutually supporting. Chapter 6: Dr Mark J. Hooper and Alkiviadis Tromaras delve into social and environmental responsibilities. Given the legal and environmental pressure, companies must ensure they and their business partners go green. This chapter analyses the relationship between business strategy and the ecological environment. Legal requirements are noted including ISO 14000. Chapter 7: Dr Zoltán Antal-Mokos identifies managerial issues that impact on successful mergers and acquisition projects. Pre-, during and post-phase difficulties and challenges are considered. Chapter 8: Prof Douglas Macbeth introduces the concepts and benefits of organizing businesses into efficient supply chains. The chapter explores issues posed by organizations that operate in supply chains around the globe. The intention is to understand the strategic and operational aspects of such organizations and therefore to recognize the interdependence of any solutions. The chapter: • addresses critical areas of knowledge about the organizational context in which international business takes place;

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• describes and compare examples of current good practice in managing extended supply chains; • reviews the use such knowledge to understand situations in organizations; • critically evaluates current practice to draw useful lessons. Chapter 9: Dr David J. Newlands examines purchasing activities from a perspective of fast moving consumer goods producers, where new products are developed and introduced with increasing regularity. This differs from conventional purchasing that also focuses on order placement and materials control. This chapter focuses on preparing to purchase for a given product, where the product attributes and process characteristics are yet to be defined. Chapter 10: Dr Isabel Fernández builds on the preceding chapters and discusses the technical practicalities of reverse logistics in order to ensure goods at the end of there service contracts and service lives are managed in environmentally responsible ways. This chapter introduces key aspects related to reverse logistics (RL). This field has been coined as ‘the last frontier for companies to cut down costs’. The discipline is extremely necessary to create sustainable development. It is estimated there is sufficient steel already in a refined state to eliminate all iron ore extraction activities for the next 400 years. This chapter provides strategies to reduce, reuse and recycle materials.

Dimension 4 – Regional and Country Specific Differences Dimension 4 reviews specific regions and countries requirements, expectations and core differences. They show how international companies truly need to manage their staff in an international context, rather than simply operating the same way in multiple countries. Chapter 11: Dr Nada Zupan explores the correlation between human resource management practices and company’s abilities to achieve and sustain peak performance. This chapter is based on the premise, that decisions about managing people make a difference: The decisions you make as a manager affect not only your own success but also employee behaviours, their performance and well being, their focus on satisfying customers, their sense of fair treatment, and ultimately, the efficiency and effectiveness of entire organization. The link between human resource management (HRM) and company performance is thus intensively studied and models of strategic HRM are developed. Of course, performance starts with every individual and thus employment relationships and psychological contracts become important. The main objective is to present theoretical background for critical analysis of various concepts and models, thus providing a framework for making good decisions. Chapter 12: Prof Hedley Malloch reviews issues of recruiting and retaining managerial talent within an international context. The primary question is ‘Should the company recruit locally or second staff from their home country to take control?’ The chapter examines corporate ways of motivating employees to take ex-patriot assignments and compares this type of strategy to recruiting locally. Chapter 13: Dr Sandra Jones examines employee relations management within an international context. Rather than taking control, the primary question here is ‘How can management become more inclusive, reduce conflict and increase the employee number of ideas and learning in order to contribute to the firm’s success?’ Chapter 14: Dr Peter Firkola emphasizes the key differences between Western and the Japanese’ approaches to management. This chapter introduces Japanese human resource management systems from a variety of perspectives. Japanese management are examined from a historical

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and cultural perspective. The characteristics of traditional and modern management practices in Japan will then be discussed. An examination of the current situation and emerging management trends in Japan is included. This chapter discusses how to do business with the Japanese as well as the transferability of these management practices. This chapter offers practical and relevant knowledge for students planning to work in an international business environment.

Dimension 5 – Markets, Marketing Modes and Sales Dimension 5 builds on the knowledge of the macro level market, in Dimension 3, by analysing individuals, groups and cliques. Once these are understood, the philosophies and processes of getting the message across, and then how these can be managed. Marketing creates many forms of data. They include ‘voice of the customer’, actual orders, requests for special products? These chapters focus on learning, recording information, observations and data mining. The data then can support focused creativity to identify new niche market segments and produce new product specifications that later become fully developed commercialized products of appropriate quality. In this context, quality is not only the eradication of process variances, but more importantly conformance to customers’ expectations and requirements. Chapter 15: Dr Simon A. Mercado examines the issues and complications of doing business in the pre-enlarged fifteen countries of the European Union. Further difficulties and differences clearly are evident with the accession of the twelve new countries. It is too early to evaluate the long term consequences of these changes. For example, the number of ‘new countries’ such as Kosovo on Sunday 17 February 2008 are changing the political and business map. Hence the chapter focuses on the pre-enlarged group of relatively wealthy nations. Chapter 16: Prof Coral R. Snodgrass examines issues to doing business and when considering marketing goods and services in NAFTA. A key recent issue that touched many businesses is the subject of border crossing delays experienced since the 9/11 attacks on the United States. Chapter 17: Visiting Professor Tim Lyons looks at developments in direct and e-marketing. As a founder of a consultancy that facilitates international business expansion in China, his team make use of these techniques to leverage there position and maximize returns on marketing Dollar investments. The point of sale in effect can be over the internet, or the result of being hosted when international business management visits the country. The chapter aims are: • to identify the difference between direct marketing and more traditional marketing methods, and the potential role for direct marketing within organization’s overall marketing strategy; • to use a conceptual framework for the planning, integrating and control of the direct marketing process; • to construct realistic objectives for different types of direct marketing; • to provide relevant input towards creative strategy; • to set a direct marketing budget and allocate resources to the direct communication elements within this budget; • to demonstrate the strategic use of each of the direct marketing elements and critically analyse and evaluate the elements of a direct marketing campaign; • identify the need for evaluating the effectiveness of the direct marketing communication plan; • to determine the role of direct marketing in branding; • to understand the role of technology in the ongoing development of direct marketing.

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Chapter 18: Dr Mayo de Juan Vigaray and Beyza Gültekin describe retail industry strategies and effects of well designed points of sale venues. These may be high street stores, stalls in exhibition halls and other locations. Individuals may feel compelled to buy because dates such as Valentines Day create expectations that people anticipate receiving a good. To clinch the deal, each of the five senses may be stimulated in store, as well as maintaining displays of goods in flattering arrangements. Chapter 19: Prof Ruben Chumpitaz and Dr Nicholas G. Paparoidamis examine service marketing issues. The key question asked is ‘Will customers be dissuaded from continuing to buy from a given supplier even if they recently have had a bad experience purchasing?’ The objectives of this chapter are twofold: First, to shed light in the theory underlying the concepts of service quality, customer satisfaction, service recovery and loyalty, and second to bring into focus the business-to-business field, presenting the theoretical grounds upon which the relationship marketing concepts of relationship quality, relationship satisfaction, trust and commitment are developed.

Dimension 6 – Money Matters Dimension 6 examines raising capital, financial appraisal, policies and risks. These verify the sensitivity and profitability of doing business internationally. Chapter 20: Prof Roby B. Sawyers identifies strategic cost management issues common to most companies and supply chains. Costs may be direct and immediate, or the result of total cost of ownership or life cycle costs included in servicing and disposal of goods. These latter issues relate to reverse logistics and environmental responsibility of producers. This chapter on cost management considers the long-term competitive success of the firm. Each successful firm maintains a competitive advantage based on a unique strategy. The strategy identifies the critical success factors that the firm must achieve. Cost management provides the information managers need to develop and implement successful strategies. Chapter 21: Prof Steve Molloy examines cost management from a not-for-profit (NFP) perspective. By reducing costs, NFPs can offer more services and buy and distribute more aid with the same revenue. The objectives of the chapter are to: • understand the nature of non-for-profits – why they not only survive, but dominate certain industries such as health, education, social services and the arts; • craft strategies for improving the effectiveness and efficiency of the nonprofit organization; and • develop control mechanisms for an organization for which there is often no ‘bottom line’.

Dimension 7 – Perfection and Performance Dimension 7 is of key importance in existing businesses. It is insufficient to simply analyse without plans or action. Action without analysis and a plan leads to unexpected consequences. Businesses must start to improve. Once started, they must accelerate the rate of learning, creativity and strive toward excellence, providing error-free products and services to gratify and delight customers.

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Chapter 22: Dr Kevin Laframboise examines total quality management (TQM) philosophies. These set the scene for effective management by defining problem solving methodologies and vocabulary that is common to all international satellite operations. In so doing, managers will be able to communicate to their workforces, despite location or national and international cultural differences. This chapter examined total quality management, its principles and applications, strengths and drawbacks, and with a focus on the effects for the broad enterprise. A complementary chapter available online from Gower Publishing’s website reviews quantitative techniques used to optimize and monitor process quality. Chapter 23: Dr David J. Newlands introduces key technology and innovation management issues for companies that have to push the boundaries of what seems possible – so-called ‘technology challengers’, while ensuring that they convert inventions and process capabilities into viable commercial products. Chapter 24: Dr Sandra Jones examines organization’s ability to harvest, collate, store and use data for commercial gains. The core principles of this chapter are that all employees are involved and that discussions are based on negotiation rather than autocratic senior management decrees. Chapter 25: Dr Keith Dawes reviews the field of tacit knowledge and converting this unspoken information into communicated and recorded data. This is the basis of explicit knowledge management practices.

Dimension 8 – Making it Happen All the chapters up to now have focused on locations, people, philosophies, relationships, infrastructure and tools. These are ‘what could be’ and ‘what is’. The chapters in Dimension 8 focus on getting started, growing the business from concept through to sustainability, creating further change, managing transitions to move away from ‘me too’ to sustainable competitive advantage, segment leadership and profitability. These chapters focus on operationalizing international business. The scope includes identifying the initial need, developing plans, getting started, testing initial assumptions, planning next stages, making it happen. Chapter 26: Dr Erkan Bayraktar explores service provision management within an international context. These types of activities make up the majority of commercial job positions in mature economies. This chapter also examines how services and manufacturing complement each other. Service facilities locations, quality, experience and other criteria are examined. Chapter 27: Dr Phil Scott introduces all of the significant components of an integrated international logistics system and how to manage each activity and combine them in a strategic manner. This chapter addresses the logistical channel, which handles the physical flow of products and service. Chapter 28: Dr David J. Newlands examines supplier development specific literature models and inhibitors to implementation are identified. Recruitment of suppliers to supplier development programmes is a significant challenge. Supplier development models have focused on the activities undertaken by purchasing staff. As with other intra- and inter-company improvement initiatives, the number of supplier development initiatives undertaken and the success rate are comparatively low. Tacit and explicit knowledge, training, development and facilitating are identified as core concepts typically omitted from conventional supplier development literature.

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Chapter 29: Visiting Professor Olga Muzychenko explores the influence of the cross-cultural environment on the behaviour of international entrepreneurs and their effectiveness. The chapter reviews effects of growing cross-cultural and cross-border interaction on the content of entrepreneurial tasks and competencies. Chapter 30: Dr David J. Newlands introduces the key issues associated with planning, forming a task force, implementing, monitoring and sustaining change. The aim is to identify key questions that must be answered in order to justify the present position or to identify questions that must be answered, and then analyse proposed solutions. Chapter 31: Dr David J. Newlands discusses a realistic supply chain game. The game structure is based on the mobile phone market and was originally conceived to teach managers and logistics planners the benefits of selecting various operating strategies. This constituted design of logistics. The author then took this basic game and developed various options that represented more accurately the reality of the industry. These versions can be used to explain design for logistics, cost control, site location decisions, just-in-time, total quality management, supply chain and purchasing, change management and support other improvement initiatives. We hope you enjoy and benefit from this combined effort. Good luck! David Newlands and Mark Hooper Lille, February, 2008

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Chapter 1

International Business – Operating Abroad David Trigg and Marie C. Trigg

A nation’s economic success depends on the capacity for its companies and trading organizations to develop business relationships, trade and do business in the international arena. We introduce conceptual and practical material necessary to consider the issues and techniques associated with doing business internationally. Components of the topic embrace: • why countries and companies need to trade internationally; • comparative frameworks for international environmental assessment, especially country risk assessment; and • international operations, including market entry strategies for multinational corporations (MNCs). In an era of growing globalization, understanding contemporary international trade theory and how it applies to the development of MNCs are essential tools. Application of business analysis to foreign market entry, the potential international mix of company operations and longer-term investment decisions by companies in a global context are also fundamental, as is an understanding of the volatility of exchange rate risk. Managers and specialists increasingly require a need to: • formulate scenarios to analyse risky situations in times of rapid, often discontinuous technological, political and social change in both the domestic and international environments; • plan for the future in a systematic way; and • retain flexibility and responsiveness where risks and change are unprecedented and unexpected. These represent major challenges for managers and specialists at all levels of an organization. Their main focus in such a context should be on the development of international business and the successful conduct of that business. The aim of this chapter is twofold: to develop an understanding of the international business environment and to develop and refine knowledge of business in an international setting. This chapter builds basic knowledge with a particular emphasis on the skills or competencies needed to ensure the successful development and implementation of operational processes applicable to the international environment. Introduction International business is commerce or trade that is carried on by a company beyond its domestic borders (Mahoney et al. 2001). It is often called cross-border trade. In most cases it is business conducted between different companies in different countries. However, as will be seen later, it

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may involve business conducted between different elements of the same company in different countries. When people contemplate international business it is most common to think in terms of bulk carriers with oil or minerals or manufactured goods in a container on a cargo ship. However, items traded in routine and spot purchase international transactions are many and varied. Perhaps the most common internationally traded item is information. Information ranges from everyday events in the nightly TV news service to confidential trading reports on market conditions in foreign countries. Other objects of international business include services such as consulting on foreign aid projects and capital for foreign investment projects. The employment of personnel from foreign sources is an increasingly important object of international business as companies seek skilled and professional managers and specialists to perform in the international arena. The ownership rights to goods, land, resources, information and businesses may be traded without transporting goods on container ships or trains, etc. For instance, Sony bought a movie studio in California; banks sell insurance policies on guarantees they made that underwrite loans they made to clients. Technology also is a much traded object of international business as companies all over the world strive to compete with each other on the basis of quality or low cost. Finally, we must not forget manufactured goods, because although their relative importance as a percentage of international business may be decreasing, they still are a vital element of business and will continue to be so into the future. Companies involved in international business range from small enterprises making goods for export through to very large MNCs that are household names. To put the scale of international business into context, the combined revenues of the top 200 corporations constitute one quarter of the world’s GDP. Their total revenues approach US$ 10 trillion.1 This can be compared to the combined revenues of the poorest 80 per cent of countries, which are around US$ 4 trillion. Whilst the total global workforce is over two and a half billion people, the combined employment of the top 200 corporations is fewer than 20 million employees.2 These figures have to be seen in the light of the fact that one of the largest employers in any country which has high social security contributions is the nation’s health service provider. This sector alone accounts for around 17 per cent of the economy and increasingly, international ‘health tourism’, where individuals travel to other countries to undergo operations more quickly than they can be undertaken, or where they are unavailable, in their home country, have dental treatment and buy prescription glasses at much lower prices than are available at home. One of the least visible international trades is known as the ‘brain drain’. Qualified individuals who have the competence to move internationally can obtain jobs in other countries. They may have studied in one or more countries and now provide value-added services to their clients in other countries. These flows of employees are examined by Prof. Malloch in ‘International Human Resource Management’, Chapter 12 in this volume.

Terminology There are many terms used in international business. The most common term is ‘globalization’. There are many definitions of globalization and these are covered in a subsequent section. In its broadest sense, globalization is the worldwide trend of economies of the world becoming borderless and interlinked (Hill 2005). The extensions to the European Union typify this trend. 1 http://money.cnn.com/magazines/fortune/global500/2006/. 2 http://www.ilo.org/public/english/bureau/stat/portal/topics.htm#paidemp.

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The globalization process allows businesses to expand beyond their domestic (national) borders. At a different level, globalization is the creation of standardized management practices and products that companies apply on a worldwide basis. The important process covered in this chapter is that of internationalization (Welch and Luostarinin 1988). Such progressions occur when a company extends its operations beyond its domestic borders. In effect it is developing into an MNC. An MNC is a company that engages in foreign direct investment (FDI). In essence, it owns and controls value-adding processes in more than one country. Another term that may be used to describe MNCs is a global corporation Mahoney et al. 2001, p. 869). These are companies that view the world as a single marketplace and strive to create standardized goods and services to meet customers’ needs worldwide. A transnational corporation (TNC) is a company that seeks to combine global scale efficiencies with local responsiveness. One last expression to note at this stage is a wholly owned foreign subsidiary. This is an enterprise that is subordinate to a parent company in another country. Assembly and manufacturing facilities owned by the parent corporation that build identical or similar products closer to the market are known as transplants. When referring to different countries, there are specific terms to denote what we are talking about. The country in which an MNC is based and has its head office is referred to as the parent or home country (ibid., p. 878). The country in which subsidiary operations are conducted is referred to as the host country. In this chapter, we limit our argument to the nature of international business under four different headings (Hill 2005): 1. 2. 3. 4.

cultural differences; politico-legal environment; commercial environments; financial issues.

Each of these areas of business is significant and raises issues that international managers must get right in order for their businesses to be successful. The first of these is that when dealing between different countries there are cultural differences to be considered (Shenkar and Luo 2004, p. 149). The most obvious cultural difference is that of language. Management must consider things like people’s social customs. For example, the way people greet each other, their concepts of hierarchy, personal space, work ethic, customer service, face, being an insider, cooperation and individual versus collectivism. Some social cultural aspects would never be accepted in private, yet are the accepted way for business and management practices. The second aspect of international business that must be covered is the politico-legal environment in which business must be conducted. Each country has its own political system and its own legal system (ibid., p. 175). Whilst these may be classified under major categories, they are nevertheless quite different. Other aspects that need to be considered are issues such as employment regulations, contracts and dispute resolution. The commercial environments of each country are also different from each other. Firstly, there are different levels of development, ranging from highly industrialized countries through to emerging economies (ibid., p. 119). Economies may be at different levels in cycles. Some countries are growing rapidly whilst others are in decline. Resource availability differs from country to country, as does the infrastructure and support necessary for the conduct of business. Emerging economies may be able to jump ahead because they adopt modern solutions without scrolling

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through obsolete phases. They can do this at lower cost because they have not invested in, and do not need to get rid of, historic legacy infrastructure, conditions and inefficient practices. The last aspect that must be considered is that of financial issues (ibid., p. 226). Countries have to trade with each other and most countries have unique currencies at variable exchange rates that need to be taken into account. In essence, parties to transactions must use different currencies. Many currencies are quite volatile and as they fluctuate, business decisions to invest in a specific location can be the difference between success and failure. Ford Motor Company’s sales of Aston Martin, Volvo and Land Rover are the result of the devaluation of the US dollar and tye comparative strength of sterling. Emerging economies, by contrast, may not have access to tradable currencies.

Classic Concepts There are many differences between domestic and international business. It may seem trite to say that the major difference is clearly the range of activities that need to be performed. However, this is indeed true. A domestic business need concern itself with operating only in its home market where the managers are very conversant with local business practices. Management must try to ward off the inbound competition from transplants and cheap imports of substitute brands that may or may not be inferior. International business, on the other hand, involves operating in host countries where conditions, laws and business practices may be significantly different. Some of the major differences are now outlined. Cultural Factors One of the very first differences to note when conducting business internationally is whether to just export or operate a wholly owned foreign subsidiary, is that employees will be dealing with people who have different attitudes and perceptions about doing business (Mahoney et al. 2001). From the very outset people talk different languages. Whilst English may be the lingua franca of international business, there are many thousands of different languages around the world. Because people need to communicate, this means that one of the two parties involved in business is going to have to use a different language or else both parties will need to find a common language, such as English. The common axiom is that ‘the British and the United States are two countries separated by the same language!’ The rate of change in both spoken and written forms of language has significantly increased since the widespread take-up of the internet. Text message codes are the most significant example of this phenomenon. We need to be very careful when it comes to speaking different languages. Just because another person speaks English as a native tongue is not a reason to think there will be no confusion. English is spoken very differently in different parts of the world and not all English words are in universal usage. Take for example the word ‘fortnight’. In the United Kingdom and other countries of the British Commonwealth the word ‘fortnight’ is used to denote a period of two weeks. However, in the United States the word ‘fortnight’ is virtually unknown. So if an English person is dealing with the American and says that the details of a project will be available in a fortnight’s time, the American may not understand and the result will lead to uncertainty. A black coffee in the UK means coffee without milk. In Israel, it means filter coffee put in a cup, to which hot water is added to make a mixture that settles at the bottom of the cup as a sludge. Israelis use the term ‘Nes’’ to indicate a coffee drink made with instant powder. ‘Arctic’ to the British means the North Pole region and implies polar bears. Israelis

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use it to mean an ice cream. The word ‘lolly’ to British means money or frozen juice on a stick. To Australians, it means confectionary. Each country will have its own customs and the way people interact with each other varies enormously. Take, for example, a simple greeting.3 In France, when entering a room, even if someone is late and the meeting is in full flow, they will greet everyone in turn. The British are more likely to ‘just slip in’ and try to not interrupt the flow. They may then apologize at a convenient moment, typically a pause or the first time they would like to contribute to the discussion. Many countries use the basic handshake where people will clasp each other’s right hand. However, there are very many variations on even this simple gesture. It is customary for Muslim men to shake hands and then touch their chest in front of their heart. People in some countries bow to each other; in others they embrace. Other nationalities not only embrace, but kiss each other on the cheek (in Britain once, France twice, Spain three kisses, Russia six!) although regional differences also apply in the same country. Convention dictates which cheek to start the sequence with. In some cultures males embrace each other when greeting. If a businessman comes from a culture where embracing another male in public is unacceptable, that person may have difficulties in undertaking a simple greeting in a foreign country. Impressions of each other on first meeting are very important and if a person perceives rudeness in the form of greeting then it may be difficult to proceed to a business relationship. Giving business cards in two hands and receiving them reverently, placing them on the desk and making frequent glances to them is the norm in Japan. Other cultures flick them across the desk at each other. They may then put the cards in a trouser pocket – a big ‘no, no’ in certain Far Eastern cultures. Perceptions and attitudes vary between different national groups (Catalyst 2006). In some Western cultures there is a perception that when business people meet they are there to do business. Other aspects of relationships are of a secondary nature. However, in other cultures, such as Asian, Middle Eastern or Latin American, people spend much time in creating a relationship in which they feel comfortable to do business. In France, the relationship is the aspect that must be maintained as a priority, even if there are frustrating issues that seem urgent and important that it would be efficient to sort out immediately. In most Western cultures, it is easy for a business person to cold call and thus make contact with a potential client previously unknown to them. In other cultures people will most likely only do business after they are formerly introduced by mutual acquaintances or agencies. Commercial Environments Each country has a different commercial environment in which business operates. First of all, each country is at a different level of development.4 The level will vary from the highly industrialized, such as Western Europe, through to emerging economies, such as those in Africa. One of the important ways in which the level of development will affect the way business operates is the infrastructure support that is vital to business. Highly industrialized countries have well-developed transport and communication systems. They have strong legal and financial systems and the capacity to enforce these systems where necessary. Emerging economies, on the other hand, typically do not enjoy systems that are as well developed. Therefore, business people will have to take into account that some countries do not have these systems to facilitate the conduct of business at the same level they are used to in their own countries.

3 http://www.executiveplanet.com/index.php?title=Main_Page. 4 http://www.worldwatch.org/node/3893.

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Each country will have different resource availability.5 Some countries have a large skilled workforce, particularly where the education system is well-developed. Other countries have a large but poorly educated workforce. Labour in such countries will typically be quite cheap relative to that in other countries6 and may be used in simple, repetitive manual activities. In wealthy countries, private loan capital will be more readily available than in poor countries. As a result, capital can be more readily raised to undertake new ventures. The credit crisis of 2007 stemmed from NINJA (no income, no job or assets) mortgages given to people who couldn’t afford to repay the loan or even service the interest. Economic and business conditions vary between countries.7 Just as countries are at different levels of development so they will be at different stages in their business cycles. Growth in some countries is at double digit levels whilst at the same time other countries may be in recession. Inflation, for example, may be very low in some countries (Japan especially), yet quite rampant in others (Zimbabwe, at the time of writing. Previously Poland, Russia and Israel have suffered crippling inflation). Politico-Legal There are many forms of political and legal systems throughout the world.8 There are over 270 countries in the world today and each has a different political and legal system. Whilst all these different systems may be classified under common headings, there are still differences between countries. Spain’s accounting system is copied from the French, which itself is borrowed from Germany. There are countries, for example, whose legal system is based on the British system of law. However, every country that adopts a system will have variations. So the law as it is applied in the United Kingdom or in Australia is different and this must be taken into account when doing business in other countries, even though they may be common law countries. Other forms of legal systems include code law and theocracy. Because business has to operate within the political and legal systems of each country there is necessarily political risk.9 Political risk is the effect on a firm’s ability to conduct value-adding operations to production due to the nature of a country’s political and legal environment. Political risk can extend from a change in government policy towards business through to civil unrest and also include civil war and foreign wars. There are many other aspects of operating within the legal environment, including simple things like employment law. For example, the duration of the working week varies around the world. In France the working week is 35 hours,10 although President Sarkozi has indicated that more flexibility will be introduced in order to reward hardworking people and enable the economy to compete. In Australia it is 38 hours. UK workers are limited to 48 hours, except for certain types of employment such as truck drivers and airline pilots, where specific legislation is in operation. Other countries can have as many as 60 hours in the working week. The benefits and conditions available to workers, including such things as meal and rest breaks, vary from country to country. The formulation of contracts for business also varies according to legal systems. The enforcement of those contracts varies around the world. The adherence to international treaty 5 6 7 8 9 10

http://www.iiasa.ac.at/Research/ECS/docs/book_st/node7.html. http://yaleglobal.yale.edu/display.articlechapter?id=3231. http://www.nber.org/papers/W9859. http://garnet.acns.fsu.edu/~phensel/intlpoli.html. http://www.political-risk.net/framesBase.htm. http://www.triplet.com/50-10_employment/50-20_workingtime.asp.

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obligations also varies.11 A country’s membership of various treaty organizations, such as the World Trade Organization (WTO), will result in the need for different business practices. Financial Most countries in the world have their own unique currency, although more and more member countries of the European Union are adopting a common currency, the Euro (€). This means that when companies wish to trade with each other around the world, they have to exchange their currency for that of the other country. An alternative is to use a common currency, such as the US dollar. Oil and aircraft are sold in US dollars. The US dollar depreciation – from about $0.80/€ in 2002 to $1.30/€ by 2007 – hampered Airbus in marketing, designing and producing their A380, sustained Boeing sales and made exports from European producers difficult. When the exchange rate stood at about $1.5/£, business was great. At the time of writing it is around $2/£. Consequently, Ford’s profitability as a result of producing Jaguar and Land Rover vehicles in the UK has dropped drastically.12 Some currencies, such as the US$ and the Hong Kong dollar, are tied to each other in their exchange rate.13 Most currencies, however, have a floating value. That is, their value against other currencies will fluctuate periodically. Some currencies are quite volatile, particularly measured over time. Because normal international business is not carried out instantaneously, it is necessary to agree on prices for the delivery of goods and services that will occur at some time in the future. Payment for goods is most often made upon delivery. This means that payment of goods to be made in the future has to be worked out in the present.14 To facilitate the negotiation of contracts it is necessary to use forward prices of currencies. These forward prices are the predictions of bankers and foreign exchange (Forex) traders of what they think the price will be at a future date.15 Business people have to agree on the value of currency at a future delivery date. If a price is struck and the currency moves in an adverse direction, this can result in failure to make a profit. Companies can insure and hedge against such currency movements, although this can incur extra expense. The nature of currencies varies around the world. Many countries have what is called hard currency that is readily tradable currency.16 The currencies of countries such as the United States and the countries of Western Europe are readily tradable on a worldwide basis. On the other hand, emerging economies may have currencies that are not always readily tradable. These are called soft currencies. Indeed, some countries do not have cash available to trade and therefore must adopt other methods. Counter-trade, that is the exchange of one lot of goods for another, is still widely used in international business. This is an international form of the barter system. While they were trading, Massey Ferguson exchanged tractors for sesame seeds. These were then sold to fast food restaurant chains in exchange for cash. This approach avoids currency exchange risks and can include an element of fair trade and sustainable development. 11 http://www.cailaw.org/ita/publications.html. 12 http://www.oanda.com. 13 http://www.expatfacts.com/topics/Foreign-Currency-Exchange.html. 14 Companies are now finding they must compete on time. The faster they can fulfil an order, the less risk there is that dramatic changes will occur. Suppliers can stipulate they wish to be paid in their own currency. Another strategy is to demand payment in a currency that is relatively more stable. This is not only limited to selling goods. ABBA, the Swedish pop group from the 1970s dictated the currency and the exchange rate they required. 15 http://www.dailyreckoning.com/rpt/SpotCurrencyMarket.html. 16 http://www.oanda.com/channels/business/business.shtml#data.

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Technological Highly industrialized countries have access to advanced technology and generally have a skilled workforce that can readily use state-of-the-art technology. Other countries may not have ready access to advanced technology and nor do they have skilled workforce able to use advanced technology. When companies set up business in foreign countries, managers need to take into account whether technology available in the home country is also available in the host country. Indeed, one of the functions of multinational corporations is to export technology from their home country to the host countries where it conducts business (Hill 2005, p. 245). Some countries are blacklisted. Trading is prohibited between US organizations and Cuba. The US also prohibits its companies and governmental agencies from trading with companies that trade with Cuba.

Internationalization Process Almost every company begins life as a domestic operation. If that company enjoys success in its home market it will seek to expand that market locally. Soon, the managers will perceive the home market as being insufficient to sustain growth and will need to expand their horizons (ibid., p. 536). Home markets may become saturated or new opportunities appear that offer promise of growth and higher returns. This is the impetus for internationalization. A simple definition of internationalization is the development of an international profile (Shenkar and Luo 2004, p. 133). A more complete definition is the increasing structural complexity of the organization as more resources are needed for cross-border operations (ibid., p. 67). It is a move outwards from the home base which may proceed at any pace and, in fact, may be reversed depending on management commitment. The success of the satellite business may depend on the comparative strengths of the organizations in the target economy. Foreign supermarket chains find it very difficult to operate in Germany and the US, for example, because of the strength of the indigenous brands. There are a number of models that examine the process. A company may stop its internationalization process at any stage of development. It may even skip stages, depending on the nature of the market. Just because a firm commences the internationalization process does not mean that it will proceed to the ultimate stage of a wholly owned foreign subsidiary involved in the full manufacturing process. The level of internationalization will depend on the commitment of managers (Hill 2005, p. 246). Resources available to a company are scarce. Access to resource availability changes over time. As a result, firms do not always proceed with their internationalization plans at a constant pace. Not all firms are equally resource endowed. It is rare to see firms in the same industry advance their international plans at the same rate. Internationalization can occur at two levels (ibid., 212–37). The first, and easiest, of the internationalization processes is through non-equity methods. Non-equity methods of market entry do not involve the investment of the firm’s capital. Nevertheless, it can still be an expensive exercise as expenditure of resources is made into foreign markets. The other method of internationalization is through equity methods. As the name equity implies, there is the investment of capital in international operations. Firms take control and ownership of resources used to add value to their operations (Mahoney et al. 2001, p. 485).

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The first of these models is the ‘stages model’ (Shenkar and Luo 2004, p. 67). This model states that firms engage in a distinct pattern of movement outwards from their home base. The parameters that affect this movement rate of involvement are ownership and the risk of investment, along with the complexity of the investment. The stages model has been developed from examination of the growth of manufacturing firms. The model seeks to explain increasing long-term revenue – that is, growth – and at the same time keeping risk-taking costs low. It is problematic whether this model can be used for service industries such as hospitality. Figure 1.1 shows a typical evolution of a multinational corporation from its embryonic beginning. On the horizontal axis is a time scale, although no absolute measures are used. There is no set pattern of time during which a multinational may evolve. Some firms may evolve into multinationals over several decades, whilst others evolve very quickly. For example, there are many firms in high technology, communications and pharmaceuticals that have developed into large MNCs in a very short space of time. On the vertical axis is the factor of complexity. Each successive stage in the evolution of a multinational involves operations of a more complex nature. According to our definition, internationalization is the increasing complexity of international operations. The options to deal with this issue are to ‘keep it simple’ by retaining all decision-making and control functions at the parent site, or to develop strong leadership locally. The most typical initial foray into international activity is by means of exporting or importing (Hill 2005, pp. 534–53). This may be by means of deliberate strategy or by pursuing a casual foreign enquiry. The local activities focus on buying or selling products and components. If this initial foray into international activity is successful, managers will continue the practice.

TYPICAL EVOLUTION OF AN MNC COMPLEXITY FOREIGN MFG FOREIGN ASSEMBLY I/N SALES OFFICE EXPORT DEPT EXPORT MANAGER FOREIGN ENQUIRY

TIME

Figure 1.1

Typical evolution of multinational corporation

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As more resources are needed to sustain this export activity, managers will need to establish a structural response and create an export-oriented work unit. It may become necessary for the firm to create international sales offices in host countries where the firm operates. This will lead to the first level of investment (ibid., pp. 468–9). International business develops the managers it needs to explore further options for conducting activities in foreign countries. As the business grows, operations become more complex as the firm moves into assembly, perhaps from knock-down kits, through to campus-based parts production for full manufacture. These operations can be divided into the two categories of equity and non-equity operations. It will be remembered that the distinction between these two methods is the pattern of capital for investment or merely an expense of doing business. Taking the equity option first, the two axes will refer to ownership and control on the horizontal axis and complexity and risk of operations on the vertical axis. Although it will be reported as a non-equity method of entry, most firms start with exporting or importing as their first venture into international operations. If the export-import activity is successful, a firm will open a foreign sales office, which is a wholly-owned foreign subsidiary. The purpose of these sales offices is to facilitate sales in host countries and to have representatives on the ground. As further sales are made, managers may deem it more efficient for products to be sent to the host country in a ‘knocked down’ state and assembled for sale in the host country. This is most often a precursor to full manufacture. Such a strategy can significantly reduce the pipeline liability costs and cost of finished goods that are in the distribution channels. This consequently increases speed to market, introduces variants only to replenish sales of stored goods, or assembles goods to exact customer specifications and thus avoids the cost of full value inventory. The strategy, however, seems to be ignored by companies that mass produce in low-cost countries because they primarily focus on unit price rather than supply chain total cost, product flexibility and obsolescence risk. For reasons that will be discussed in the international strategy section, firms may not wish to create a wholly-owned foreign subsidiary to manufacture their products. For political or legal reasons it may be more advantageous to seek a local partner. Creating a joint venture with a local company is a way of sharing risk, depending on the stability of the operating environment in the host country (Shenkar Luo 2004, p. 130). Managers may consider that sharing resources with a host country firm is a better way to operate. This gives rise to a joint-venture operation that is a way of sharing resources, which is generally done on a 50/50 basis. In the non-equity model, the graph represents the involvement and a risk involved in equity methods of the internationalization process. The horizontal axis is an indication of the degree of involvement and control of the operation. The vertical axis is an indication of the risk and complexity of the particular types of operation. The various methods of non-equity entry are given as a progression. However, it is not necessary for a multinational to progress from one method of operation to a higher level unless there are strategic imperatives and corporate commitment to do so. It has been stated previously that exporting and importing is the least risky of all forms of international activity. It does, however, have associated risk. There are issues of non-payment, delivery time and actual delivery. Licensing is the legal use of intellectual property and brand identity by another firm (Mahoney et al. 2001, pp. 643–6). One firm, the licensor, creates intellectual property such as a formula, a recipe or other patent. The Body Shop grew as a result of this strategy into a multinational with significant brand presence. While production was centralized, goods sales were expanded across a wider geographic area and revenue was generated from franchise

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agreements. Perhaps the most common forms of intellectual property are software, recorded music or film. Another firm – the licensee – purchases the legal right to use this intellectual property to create product(s) that they then sell into the marketplace. A useful example of this process is the manufacture of yoghurt. The original recipe was created by a French firm that then sold the right to use this recipe to companies in many other countries for production and sale. Franchising is essentially an advanced form of licensing where one company – the franchisor – owns intellectual property and allows other companies – franchisees – to use that property (ibid., pp. 480–81). The biggest difference between franchising and licensing is that the franchisee uses the name of the franchisor. The most prominent examples of franchising are perhaps found in the fast food restaurant industry, such as McDonald’s Corporation. Individual restaurants are owned by private companies and enter into royalty agreements with McDonald’s Corporation for the use of their intellectual property and their trading name. As can be seen, the degree of risk and complexity in operating a franchise is much greater than that of operating a licence. Therefore the degree of involvement and control by the franchisor needs to be much greater as they are protecting their intellectual property and their name and reputation. Higher-level entry strategies such as subcontracting and turnkey operations are far more complex because of specifications written into contracts. For example, if a company is building a utility complex, such as a power generating plant, for a client company – which is a turnkey operation – the risk is very high and the degree of control by the contracting company needs to be much greater. Whilst this model is useful as showing the development of international firms, there are some difficulties with it. Even casual observation of the development of multinational corporations indicates that there is some leapfrogging. That is, firms may not go through every stage as set out in the model. As a firm gains experience in foreign markets it is possible that in subsequent markets a firm will move to an advanced stage of the model without going through the early stages. Some companies increase their global presence by taking over ailing businesses. These may be competitors or in other sectors that would widen their business portfolio or bolster strategic weaknesses with their strengths. An issue noted by Lamming (1993) is that vertically integrated firms that buy and sell within the group perceive less commercial pressure and hence may provide worse service and lower quality than that available from external competitors. Another variable that impacts on the rate internationalization is ‘psychic distance’. Psychic distance is defined as the perceived remoteness and cultural differences of the host country. With the advent of increased and improved transport and communications the phenomenon of psychic distance is becoming less of an issue. Transaction Cost Analysis (TCA) Model The objective for all firms is to provide revenue growth and/or reduce costs. This objective is the basis of explanation for structural decisions. Transaction costs consist of ex-ante costs plus ex-post costs. The former comprise search and contracting costs. The search costs consist of gathering information to identify and evaluate potential international opportunities. Contracting costs are associated with negotiating and writing agreements between sellers and buyers. Ex-post costs comprise monitoring costs and enforcement costs. Monitoring costs are associated with fulfilling predetermined sets of obligations. Enforcement costs are associated with sanctioning a trading partner for not performing in accordance with the agreement. The

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obvious goal is to minimize the combination of these costs. Therefore, a firm will internalize these costs where it can see a benefit to itself. It will undertake the value-adding operations under its own auspices if it believes the operation will be cheaper than contracting it out to another firm. Intellectual property is a key consideration. All vehicle manufacturers produce the pressings and assemble the vehicle. The shape of the car is their trademark design feature and early adoption of innovative methods to increase quality, strength, rigidity and production efficiencies reduce labour requirements. Some of the parameters that guide the TCA (Hill 2005, p. 683) model include bounded rationality, which refers to be framework in which managers think. Because of their experience in business operations, managers tend to contemplate ways that have provided effective, efficient or elegant solutions to them in the past. Although managers are expected to think ‘outside the box’, only a few ever really do this. If managers are expected to take last year’s model and modify it 2 or 3 per cent, they will essentially only tweak what they did and not really think differently. If managers are challenged to create radically different or superior results, hundreds or thousands of percentage point differences for example, they will think differently because the ‘glass ceiling’ has been removed. It is not enough simply to have the ideas. Managers must be able to sell their solutions or convince others that the change needs to be undertaken and soon. The fear of what will be done should be less than the fear of failure and business collapse if nothing is done or if they continue on as if nothing was untoward. Business decisions are beset with uncertainty because risks are only just being identified. They also are ambiguous because there are more questions than solutions. There is internal uncertainty within the company that is controllable by managers, such as the availability of resources and the framing of budgets. There is also external uncertainty such as demand for product. Whilst uncontrollable by managers, it is certainly still manageable. Information may be asymmetrical with information coming from different sources. Because sources may differ both in their collection of data and its interpretation, there will always be a need to reconcile these differences to make useful and meaningful decisions. Despite the best market research and planning there is no guarantee that all information is accurate. There are also underlying factors such as management commitment to a certain plan of action as we saw in the stages model. Business decisions affect the future. They are made in the present based on historic data and predictions or forecasts. Clearly, as time goes by, more will be learned and insights will be clarified. As a result, the strategic commitment to a decision will need to be revised and new strategies and decisions made to fit with the scenarios and contexts businesses have to operate in.

International Strategy An expression often used in the international context is ‘going global’ (Shenkar and Luo 2004, p. 88). This refers to the potential scope for all of the organization’s operations to be uniform around the world and its ability to compete on a worldwide basis. There are two ways that a multinational corporation can direct its offering of products and services. The first of these is by standardization, where a company sees its market as a homogenized, uniform place for trade (Mahoney et al. 2001, pp. 643–6). It assumes that customer preferences are universal. On the other hand, companies may see a need for customization of goods and services and the adaptation of these according to national or regional preferences. The differences between the two are that the latter is customer driven rather than being product and production efficiency driven.

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Companies will expand according to their resource availability and their core competencies. Management commitment and decision-making companies can position themselves as they wish along the value-adding chain. Hence, companies are also capable of organizational learning. That is, as managers gain experience in different types of international operations they can expand their activities according to the extent of that knowledge and experience. Managers don’t have a script. Some may rely on facts and evidence. Others rely on intuition and ‘gut feeling’. All managers must make the effort to convert tacit knowledge that is in the heads and experience of their supply-chain participants into explicit recorded data that then can be analysed, debated and then plans decided upon. Chapters by Jones and also by Dawes in this volume debate tacit and explicit knowledge management issues and processes. One useful device is known as a life cycle (Shenkar and Luo 2004, p. 61). We are familiar with this process from study of such things as marketing. Products are all fully developed in the domestic market and available for sale in that market. As a firm seeks expansion it will exploit that product to enter likely foreign markets. As the product succeeds in the host country markets, competitors will also start production of similar products. As the product matures in global markets, companies tend to seek to reduce costs and start a search procedure to reduce production costs. For example, if labour is a major cost of production a company may seek out lower labour wage countries and transfer production. They also benefit from tax holidays and other incentives when doing so. The key potential drawback is the increased downstream distribution time and the consequent increase in pipeline stock value, which is a risk to profit. As mentioned above, the choices available for a company to expand its operations internationally will depend on the resources available to it and also its current operating position. These aspects are internal to the company and therefore controllable by the managers. Management should consider the resources and assets that managers currently have available and their effectiveness in acquiring extra resources and assets. These may be generated internally by sales revenue or else be acquired from shareholders and/or lenders, such as banks. Experience in international operations is also a variable asset. Managers acquire experience by actually doing business in foreign markets. However, companies can acquire experience by recruiting appropriately skilled personnel. The former method takes time, while the latter can provide a much quicker access to growth. External to the company but still manageable are various industry drivers. These industry drivers include issues such as the nature of the market, government regulation, the nature of competition and industry cost structures. The nature of the market will depend on the host country’s level of industrialization. Companies from developed countries are more likely to trade with companies from other industrialized countries. As a result we see the highest levels of international business being conducted between Western Europe, Eastern Asia and North America. These are trading groups of countries that have high per capita income and large levels of disposable income. These markets also are highly sophisticated with very cosmopolitan tastes. Governments in all countries are the major players in international business, whether they are taking part in business themselves or merely acting as regulators. There is international cooperation between countries under the auspices of organizations such as the WTO (Hill 2005, p. 180). Countries may go into partnership with others such as the European Union (EU) or the North America Free Trade Association (NAFTA). Markets that were once closed or centrally planned are opening up to be more market driven and provide many opportunities for foreign companies.

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Putting these two issues together, managers have available to them a number of strategy levers. These include the nature of the product/service offerings. There are many ways in which managers can participate in the market. Managers can also make choices about the location of activities, whether it is production or sales. They also can make a choice about which competitors they choose to compete with and the nature of that competition. For example, there are companies that choose to compete on a head-to-head basis, such as Coca-Cola and Pepsi in the soft drink industry or Hertz and Avis in the rental car industry.

Conclusions This chapter has introduced various themes that are examined in detail within subsequent contributions of this volume. To become a successful manager in the international context requires a wide range of knowledge and understanding. These fields include cultural differences, the politico-legal environment, commercial environments and financial issues. There is no unique solution – a ‘one size fits all’ strategy. Corporations are staying small, evolving, growing or collapsing, adapting or remaining as stalwarts, competing or making their own unique market where they dominate a new niche. Large monolithic corporations such as IBM have broken up. Their single company solution is now a myriad of niche players that each provide the best on offer and enable clients to choose an individual custom-made solution. A business cannot exist on its forecasts. It must have orders. A company’s business is the orders it receives. Key to success is how the company organizes internal and external resources to satisfy those orders while ensuring that the many key performance indicators show they are doing this competitively. To acquire orders with a minimum of capital investment, franchising and licensing may be a viable option. McDonald’s and The Body Shop are key examples of this strategy successfully applied.

References Catalyst (2006), ‘Different Cultures, Similar Perceptions: Stereotyping of Western European Business Leaders’, http://www.docuticker.com/?p=5589. Hill, C.W.L. (2005), International Business: Competing in the Global Marketplace (New York: McGraw Hill). Lamming, R. (1993), Beyond Partnership – Strategies for Innovation and Lean Supply (London: Prentice Hall International). Mahoney, D., Trigg, M.C., Griffin, R. and Pustay, M. (2001), International Business: A Managerial Perspective, 2nd edn (Frenchs Forest: Prentice Hall). Shenkar, O. and Luo, Y. (2004), International Business (Danvers: Wiley). Welch, L.S. and Luostarinen, R. (1988), ‘Internationalization: The Evolution of a Concept’, Journal of General Management 14(2) (Winter), pp. 36–64.

Chapter 2

International Strategy Management Mark J. Hooper

Strategic Management in the International Arena As firms position themselves to compete on a worldwide basis, they will continue to seek external reinforcement of their efforts, such as international trade agreements and favourable national industrial policies. Going global raises several internal issues that need to be successfully managed. This chapter discusses multinational corporations and explores international operations from the strategic management perspective: analysing the environment, establishing organizational direction, formulating strategy, implementing strategy, and exerting strategic control.

Multinational Corporations Asserted by contributors to Wikipedia,1 a multinational corporation (MNC) is an ‘enterprise that manages production establishments or delivers services in at least two countries’. MNCs are also known as multinational enterprise (MNE), transnational corporation (TNC) and multinational organization (MNO). MNCs can be divided into three distinct subgroups: 1. Horizontally integrated multinational corporations manage production establishments located in different countries to produce the same or similar products. 2. Vertically integrated multinational corporations manage production establishments in certain countries to produce products that serve as inputs to production establishments in other countries. 3. Diversified multinational corporations manage production establishments located in different countries that are neither horizontally nor vertically integrated. Given their large economic influence as well as their extensive financial resources available for public relations and political lobbying, MNCs can exert a powerful influence over international relations. Analysis of the 100 largest economic entities reveals the economic power of MNCs (Anderson and Cavanagh 2000).2 Table 2.1 shows key findings. The Economic Power of MNCs Multinationals have played an important role in globalization. Given their international reach and mobility, prospective countries, and sometimes regions within countries, must compete 1 http://en.wikipedia.org/wiki/Multinational_corporation. 2 http://www.webeurope.co.uk/corporate-power-the-facts.htm.

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Table 2.1

The economic power of MNCs

• 51 are now corporations and 49 are countries. • The world’s top 200 corporations account for over a quarter of economic activity on the globe while employing less than one per cent of its workforce. • The Top 200 corporations’ combined sales are bigger than the combined economies of all countries minus the biggest 10. • The Top 200s’ combined sales are 18 times the size of the combined annual income of the 1.2 billion people (24 per cent of the total world population) living in ‘severe’ poverty. • Between 1983 and 1999, the profits of the Top 200 firms grew 362.4 per cent, while the number of people they employ grew by only 14.4 per cent. • A full 5 per cent of the Top 200s’ combined workforce is employed by Wal-Mart. • United States (U.S.) corporations dominate the Top 200, with 82 slots (41 per cent of the total). Japanese firms are second, with only 41 slots. • Between 1983 and 1999, the share of total sales of the Top 200 made up by service sector corporations increased from 33.8 per cent to 46.7 per cent.

with each other to have MNCs locate their facilities within their region. Once installed, spin-off benefits for regions when MNCs set up include future tax revenues, employment and stimulated economic activity. ‘To compete, countries and regional political districts offer incentives to MNCs such as tax breaks or holidays, pledges of governmental assistance and improved infrastructure. They may relax environmental and labour standards. This process of becoming more attractive to foreign investment can be characterized as “a race to the bottom”.’3 There is no clear consensus on the origin of the first MNC. Some have argued that the Knights Templar, founded in 1118, became a multinational when the order started providing banking services in 1135. However, others claim that the honour goes to the Dutch East India Company (Vereenigde Oostindische Compagnie) when it first appeared in 1602. Since the expression MNC first appeared in 1974, the term has been used to describe organizations that have significant operations in more than one country. The organization that invests in international operations is called the parent company; the country in which the parent company makes the investment is called the host company. If the facility is a production unit that replicates existing infrastructure, this is called a transplant. The multinational corporation views its diverse activities as a whole and develops and implements a unified strategy to encompass all of them. At the end of World War II, the US was the most powerful industrial nation and for the next 35 years US enterprises ranked among the largest in the world. In 1975, 126 of the world’s 260 multinational organizations were based in the US, including 15 of the largest 25 multinationals. In the 1980s and 1990s, things began to change rapidly. Japanese, British, German, French, 3 http://www.answers.com/topic/multinational-corporation.

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Dutch, Italian and South Korean multinational organizations grew in strength and size and began challenging US companies, even in the North American market.

Transforming into Multinational Corporations Some organizations accomplish the transformation into multinational corporations in stages: their early foreign operations rely on exporting and they progress gradually through licensing to direct investment. Today, however, progress in technology and global interdependence has freed organizations that do not rank with MNCs to exploit the potential of international markets. For example, Alpha Electronics is a small- to medium-sized enterprise employing 38 people with an annual turnover of £1.8 million. Based in the industrial centre of Coventry, United Kingdom (UK), they manufacture printed circuit boards for a broad base of end customers in the aerospace, automotive, telecommunication and research industries in the UK. In an increasingly competitive global environment the UK has seen a significant reduction in its PCB industry resulting from low-cost/high-volume manufacturers in the Far East importing direct to the UK marketplace. By virtue of its size and most importantly its focus on delivering total solution products to customers, Alpha Electronics has established itself as a leading provider of prototype and low volume circuits with a reputation for delivering reliability, responsiveness and expertise. This focus is the key to its future survival and competitiveness (Hooper et al. 2001). Irrespective of size, all companies competing on a global basis must perform the main steps of the strategic management process. International Environmental Analysis Environmental analysis is the process of monitoring the conditions in which an organization operates. The framework typically used to aid this systematic discussion is ‘SWOT analysis’ that allows the present and future Strengths, Weaknesses, Opportunities and Threats that affect the progress of an organization toward its goals (Ansoff 1965; Andrews 1987). This complicated process involves analysing: 1. the general environment – social, economic, technological, ethical and political/legal conditions; 2. the operating environment – suppliers, competitors, customers and labour conditions; 3. the internal environment – conditions within the organization; Table 2.2 shows a possible SWOT analysis for two MNCs, Apple Computers Inc. and Cannon Inc. SWOT analysis has been criticized for its apparent simplicity which has lead to a check list mentality to be applied to strategic analysis. Hill and Westbrook (1997) and later McDonald (1999) contend that SWOT analyses often yield only ‘shallow extemporaneous inventories’ that are as likely to detract from critical issues, themes, and forces that enable them to be identified. Alternative models to identify and analyse strategic issues have been proposed including resource-based SWOT analysis that draws on Porter’s work (1979, 1980, 1991a) and Brandenburger and Nalebuff’s value net (1995). From a resource-based perspective, strategic implications determine strategic significance. Therefore, identifying significant SWOT attributes and deriving their strategic implications are interactive rather than sequential tasks. Further,

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Table 2.2

Example SWOT analysis for Apple Computers and Cannon

strengths and weaknesses commonly define and are defined by opportunities and threats. Hence, the importance and status (favourable or unfavourable) of many factors that comprise a business’ internal and external domains are contextually determined and far from apparent at first glance. Analysis of MNCs strategic environmental context needs to be more complex than that of a purely domestic firm. Fombrun and Wally (1993) suggest that this complexity can be expressed as a function of three forces: 1. worldwide infrastructure; 2. worldwide socio-structure; 3. worldwide superstructure. Figure 2.1 illustrates some of the relationships between the forces of change, emerging trends and the issues that affect environmental analysis of international operations. For example changes in socio-structure may lead to the emergence of regional trading blocs. In turn, each bloc implies a unique set of market changes, competitive changes, and regulatory changes that guide the organization’s environmental analysis. This demands that the multinational organization acquires additional skills, flexibility and expertise that the purely domestic organization does not require because it does not encounter these environmental complexities. Within the general model for the links between the forces of change and emerging trends in Figure 2.1, several specific trends affect all multinational organizations’ environmental analysis efforts. Porter’s analysis (1991b) identifies several of these trends: • Fewer differences among countries. Differences in such areas as income, energy costs, marketing practices, and channels of distribution seem to be narrowing. In many industries, it is no longer meaningful to separate the European market from the American market or the Asian market. Consumers are becoming increasingly alike (Ohmae 1991).

International Strategy Management

Forces of Change

Infrastructure

Emerging Trends New Technology for travel, communication and transportation Global market Intergration

Regional trade blocs and communities Sociostructure Third capitalized nations on the periphery of the developed world

21

Organizational Considerations How could communications technology Change the organization? How could new patterns of trade and transportation change the organization? Where are the best sources of capital? How could new patterns of direct investement change the organization? How could intergration of North American markets change the organization? How could intergration of Asia or European markets change the organization? How could an enlarged pool of cheap, unskilled labour change the organization? How could a an enlarged pool of cheap, skilled labour change the organization?

Shifting political power Superstructure Western influence

How could the widening disparity between haves and have-nots change the organization How could the collapse of regimes change the organization? How could the emergence of fragmented new nations change the organization? How could the widespread acceptance and use of English change the organization? How could the spread of homergeneous, Western style consumerism change the organization?

Figure 2.1

The relationship of change forces to organizational actions

• More aggressive industrial policies. The governments of such countries as Japan, Germany and Taiwan have developed fiercely competitive attitudes toward international business. The future policies of these governments will probably make the international environment more and more competitive. For example, aggressive planning has moved Taiwan from an agricultural economy in the 1960s to being a worldwide economic power in the 1990s. This performance has brought so much success that in 1992, Taiwan had tangible assets worth $3.5 billion on the Chinese mainland; $5 billion in Malaysia, $3.4 billion in Thailand, $2.8 billion in Indonesia. Probably the next country to be a star performer in the region will be Vietnam. In general terms, pick any Asian country with cheap land and labour from the Philippines to Sri Lanka, and a Taiwanese business is probably putting up a factory there to make umbrellas, toys, wigs, textiles or goods for sale in markets across the globe. • More vigorous protection for distinctive assets. More and more countries, and some individual business leaders, seem to be focusing on determining their own unique assets and exploiting this uniqueness to best advantage. An example of this trend was the formation of the oil cartel, the Organization of Oil Exporting Countries (OPEC). Although the effectiveness of this cartel has varied over time, its primary purpose is

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The Global Business Handbook still clear: to protect the return its members can generate on a scarce natural resource – oil. Despite the fact that less than 50 per cent of the world’s oil comes from OPEC nations, this cartel is blamed for price rises that stem from traders’ concerns relating to global capacity. Richard Branson, founder of the Virgin Group, is now entering the oil exploration and refining sector with the establishment of Virgin Fuels, in collaboration with other partner businesses. His goal is to reduce the price of fuel globally through such ventures (Business Week 2005). • Emerging, large-scale markets. In volume terms, world trade expanded at an average annual rate of 5.6 per cent between 1953–1963 and 8.5 per cent between 1963–1973. This is much higher than the average rate of 3.5 per cent between 1873–1913 and the 0.9 per cent in the inter-war period of 1919–1939. This unprecedented expansion in world output and trade in the post-war era provided the Asia Pacific economies like Japan and the four newly industrializing economies (NIEs) South Korea, Taiwan, Hong Kong and Singapore, with a conducive and stable environment for export-led growth. Consequently, during the past three decades, the four East Asian NIEs have become the most dynamic middle-income economies in the world. Their annual growth rates in terms of GNP per capita between 1965–1995 averaged 6 to 8 per cent, triple the average rate of 2.3 per cent for middle-income economies of the world and almost double the 4 per cent average for countries in the Association of South East Asian Nations (ASEAN), excluding Singapore. • Competition from developing countries. Now, more than ever before, smaller developing countries are becoming competitors in international markets. Malaysia, for example, is the largest exporter of semiconductor chips in the world. Environmental analysts for multinational corporations cannot stop after evaluating the larger, more established competitors; they must consider threats from developing countries, as well.

International Organizational Direction The complexity of the international environment, magnified by several significant trends, affects the multinational firm’s analysis of its environment. Based on this environmental analysis, managers must establish a direction for organizations that operate internationally. Figure  2.2 illustrates the most significant environmental factors together with the possible strategic reactions. As with the wholly domestic enterprise, the multinational organization must carefully evaluate the results of environmental analyses and then develop an organizational vision and mission. Managers must decide on the type and extent of international involvement they want to pursue, because this decision guides the establishment of appropriate organizational goals. After clarifying a vision and defining a mission, managers provide further direction for a multinational organization by developing long-term goals and short-term tactics. Naturally, these reflect the type and extent of international involvement outlined in the company mission statement. However, host countries often impose constraints that affect the goals of multinational organizations. Such constraints can take many forms: • a host country may require that a local person or firm maintain a major or controlling interest; • host countries commonly demand that their own citizens hold certain management and technology positions;

23

ti o bu n

Co mm u Str nicat ate ion gy s

t uc tegy d a o Pr Str n sig De

t en m n ns r ve latio o G gu Re omy Econ Pricing Strategy

s tic gis Lo ategy Str

Figure 2.2

ds

i str Culture

Strategic Reaction

dar Stan

Di

Environmental Differences

Competiti on

International Strategy Management

Environmental forces and strategic reaction

• host countries normally require some level of training for all their citizens employed by a foreign multinational; • host countries seek technology-based businesses and strive to raise the technology levels of multinational organizations within their borders. International Strategy Formulation Following the general model of the strategic management process, managers formulate a strategy that reflects organizational goals, that in turn reflects the organization’s mission. Whether the organization limits itself to domestic operations or enters into international operations, the purpose of strategy is the same. Over the years many different companies have formulated and successfully implemented numerous international strategies. All of these specific strategies fall into three broad categories: 1. trade-related; 2. transfer-related; 3. direct investment. These strategies require different commitments from parent companies to foreign markets and offer parent companies varying levels of control over foreign operations (see Figure 2.3). Inflexible multinational organizations’ initial foreign operations involve trade-related activities such as exporting and, as the organization grows, progression is made though transfer

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Commitment to Foreign Operations /Risk/Return High

Medium

Low

s gre o r P

N fM o n si o

Cs

FDI Related

Umbrella Company Wholly owned Subsidiary Equity JV Cooperative JV Branch

Transfer Related

BOT Franchising Licensing Leasing

Trade Related

None

Countertrade Subcontracting Exporting

High None Low Medium Level of Foreign Operations Control/Resource Commitment Figure 2.3

Strategic commitment options available to companies

activities leading ultimately to direct investment. Regardless of the stage and the direction of a MNC’s progress, strategy formulation needs to involve an assessment of the level of commitment to, and control of, foreign operations that the organization’s mission demands. Trade-related business can be defined as selling goods or services to customers in a foreign country. This strategy leaves an organization’s production facilities at home, from where it transfers products abroad. This strategy minimizes foreign investment, since the firm usually hires a foreign agent to act on its behalf and products are often shipped directly to customers’ warehouses. This strategy exposes the exporter to high transportation costs, however, and it must deal with government regulations and other operational and strategic issues from a distance. Transfer-related business grants one company’s right to its brand name, product specifications and the like, to another company. The recipient then sells the goods or services. The purchaser of the licence hopes to profit from selling the products, whereas the seller of the licence profits from the fees charged for the it. At the international level, the purchaser and the seller of a licence are from different countries, or the purchaser will sell the products in a country other than the one in which it bought the item. For example, today all of the South Korean automobile manufacturers licence technology from Japanese companies such as Nissan, Toyota and Honda. This is in direct contrast to the 1950s and 1960s, when almost all Japanese auto makers set up technology and product transfer agreements with American and European producers. The notable exception to this trend was Toyota. They developed by reverse engineering products and benchmarking, then developing their own component and product variants. This kept Toyota’s technology acquisition costs low. In fact, many of the Japanese auto makers did not fully reimburse their Western technology suppliers. Franchising is a form of licensing that usually covers access to a wider range of rights and resources, perhaps including production equipment, managerial system, operating procedures,

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advertising and trademarks. McDonald’s and Kentucky Fried Chicken (KFC) branded outlets are good examples of MNCs that sell franchises around the world. An extension of this approach is Build-Operate-Transfer (BOT). Sometimes this is referred to as turnkey, where a business undertakes and supervises the construction of a manufacturing or business system and then delivers this to the desired geographical location. Foreign direct investment (FDI) is the term used to describe organizations’ acquisition and operation of assets in a foreign country. This may involve purchasing existing factories and equipment or constructing new plants and purchasing new equipment. MNCs often implement direct investment strategies by entering into cooperative or joint equity ventures, in which two companies contribute to the costs of creating a third business entity. Both firms usually share in the ownership of the joint venture and in its returns (Contractor and Lorange 1988; Gulati 1988). New United Motor Manufacturing Inc. (NUMMI), a joint venture formed by Toyota Motor Corporation and General Motors in Fremont, California, is an example. MNCs often form joint ventures to create synergy between the different skills sets of the two parent companies. In the NUMMI example, General Motors (GM) tried to access Toyota’s expertise in the manufacture of small cars, whilst Toyota tried to gain GM’s knowledge of manufacturing and selling cars in the US market. When joint ventures are driven by this logic, the strategy formulation is guided by each parent company’s desire to learn and internalize the skills of the other (Hamel 1991). This desire can also transcend business sectors, as is shown in the case of the joint venture between Nestle and Coca-Cola. Here, both companies exploited their respective skills and knowledge in marketing canned goods and coffee production in order to manufacture and distribute canned coffee in Hong Kong and Korea (Barney 1997). Direct investment can also create a wholly owned subsidiary. An example of this direct investment strategy led various companies to start manufacturing and selling their products in Japan. Kodak, IBM, Procter & Gamble, and Motorola are examples of American companies that have successfully launched wholly owned subsidiaries in Japan. International Strategy Implementation After conducting an environmental analysis, establishing an appropriate organizational direction, and carefully formulating a strategy to take the firm in that direction, managers of international operations must implement the strategy they devise. Implementing an international strategy is generally considered a much greater challenge than implementing a purely domestic strategy. Managers in multinational organizations have to design administrative systems for their employees across the globe, and then provide the management leadership in those locations to ensure results are achieved.4 The design of an administrative system is driven by two imperatives: the need to align the systems with the overall strategy of the organization, and the need to accommodate the cultural characteristics of each host country. Table 2.3 illustrates some inherent difficulties in trying to satisfy these imperatives. Although the table describes the cultural characteristics of only Japanese, North American and Latin American managers, it demonstrates the complexities of designing systems to suit multiple host countries.

4

See Chapter 11 by Nada Zupan, in this volume.

26 Table 2.3

The Global Business Handbook A comparison of cultural values

Japanese values

North American values

Emotional sensitivity highly valued

Emotional sensitivity not highly Emotional sensitivity valued valued

Latin American values

Restrained emotions

Straightforward or impersonal relationships

Emotional passion

Subtle power plays; conciliation

Litigation; little emphasis on conciliation

Overt power plays; exploitation of weakness

Loyalty to employers; employers Lack of commitment from carrying for employees employees and employers

Loyalty to employer

Group or team decision-making; Team or group work provides co-conscious input to single decision maker

Decisions handed down from one individual

Face Saving is critical

Decisions based on cost-benefit

Face saving critical

Open special interest influence

Influence of special interests, but often not considered ethical

Satisfying special interests expected and condoned

Non-confrontational

Confrontational; impersonal

Confrontational; passionate

Accurate written statements; must be valid

Documentation seen as evidential proof

Documentation seen as obstructive to understanding and enacting general principles

Incremental approach to decision-making

System based decision-making

Impulsive, spontaneous decision-making

Team or group seen as paramount concern

Individual

International Strategic Control Controlling an international strategy must follow its implementation. Control ensures that the strategy is effective, given organizational conditions. Comparing this effectiveness to some predetermined standard and making any necessary changes are both part of strategic control. Managers refer to the same financial standards at the international level to establish the appropriateness of performance as at the domestic level. Business people often mention return on investment as the most important financial measurement by which to evaluate the performance of foreign operations. Applying such financial measurement is complicated, however, for operations in different countries. The comparison must take into account different currencies, different rates of inflation, and different tax laws, all of which contribute to this complexity. In the final analysis, comparing the financial performance of operations in different countries is very difficult and commonly somewhat subjective.

Conclusions Any organization that operates internationally must adjust its strategic management process to account for the complexities of cross-border transactions. International business has grown

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in importance in recent years and this trend will only accelerate as national markets become more integrated and trade between them increases. International trade agreements define much of the structural background for this trade. The World Trade Organization (WTO) is a broad, multilateral organization that establishes rules for international trade through consensus among its member states. It aims to manage international trade, negotiate market regulation and resolve disputes between its members. Regional trade agreements (RTAs) function within guidelines defined by the WTO to promote trade between neighbouring countries without excluding products from outside the region. The North American Free Trade Agreement (NAFTA),5 the European Union (EU), and the Asia-Pacific Economic Cooperation forum are three prominent RTAs amongst the 211 that currently exist as of September 2006 (Figure 2.4).

Number of RTAs

250 200 150 100 50

19 48 19 52 19 56 19 60 19 64 19 68 19 72 19 76 19 80 19 84 19 88 19 92 19 96 20 00 20 04

0

Year

Figure 2.4 The evolution of RTAs 1948–2006 (WTO Secretariat) Within the provisions of these agreements, national governments develop and implement industrial policies to promote the competitive success of native organizations. These policies can seek to achieve broad, nationwide objectives or target specific industries for special attention. Multinational corporations react to the pressures of international operations by adjusting their procedures to complete the strategic management process. Environmental analysis for such an organization must expand its scope to evaluate conditions and trends in distant, often idiosyncratic markets. Its vision and mission statements must guide decisions about the appropriate type and extent of international involvement, given the results of the environmental analysis. Managers then formulate strategies designed to move the firm in this chosen organizational direction, often following the traditional progression from exporting through licensing to direct investment in foreign operations. Implementing a previously formulated strategy becomes vastly more complex when it leads the firm across international borders; cultural differences can demand changes to the most successful strategy. Finally, strategic control of international 5

See Chapter 16 by Coral Snodgrass, in this volume.

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operations faces problems to adjust familiar financial standards, especially return on investment, for differences in currencies, inflation levels, and tax laws, among other factors.

References Anderson, S. and Cavanagh, J. (2000), The Rise of Corporate Global Power (Washington, DC: Institute for Policy Studies). Andrews, K.R. (1987), The Concept of Corporate Strategy (Homewood, IL: Irwin). Ansoff, H.I. (1965), Corporate Strategy (New York: McGraw-Hill). Barney, J.B. (1997), Gaining and Sustaining Competitive Advantage (Reading, MA: AddisonWesley). Brandenburger, A.M. and Nalebuff, B.J. (1995), ‘The Right Game: Use Game Theory to Shape Strategy’, Harvard Business Review 73 (July–August), pp. 57–71. Business Week (2005), 20 September. Contractor, F.J. and Lorange, P. (1988), Competitive Strategies in International Business (Lexington, MA: Lexington Books). Fombru, C.J. and Wally, S. (1993), ‘Global Entanglements: The Structure of Corporate Transnationalism’, in Pucik, V., Tichy, N.M. and Barnett, C.K. (eds), Globalizing Management: Creating and Leading the Competitive Organization (New York: John Wiley & Sons). Gulati, R. (1998), ‘Networks and Alliances’, Strategic Management Journal 19, pp. 293–318. Hamel, G. (1991), ‘Competition for Competence and Interpartner Learning within International Strategic Alliances’, Strategic Management Journal 12, pp. 83–103. Hill, T. and Westbrook, R. (1997), ‘SWOT Analysis: It’s Time for a Product Recall’, Long Range Planning 30 (February), pp. 46–52. Hooper, M.J., Steeple, D. and Winters, C.N. (2001), ‘Costing Customer Value: An Approach for the Agile Enterprise’, International Journal of Operations and Production Management 21(5/6), pp. 630–44. McDonald, M. (1999), Marketing Plans (Oxford: Butterworth-Heinemann). Ohmae, K. (1991), ‘Becoming a Triad Power: The New Global Corporation’, in Vernon-Wortzel, H. and Wortzel, L.H. (eds) Global Strategic Management: The Essentials (New York: John Wiley & Sons). Porter, M.E. (1979), ‘How Competitive Forces Shape Strategy’, Harvard Business Review 57 (March–April), pp. 137–45. Porter, M.E. (1980), Competitive Strategy (New York: Free Press). Porter, M.E. (1991a), ‘Toward a Dynamic Theory of Strategy’, Strategic Management Journal 12, pp. 95–117. Porter, M.E. (1991b), ‘Changing Patterns of International Competition’, in Vernon-Wortzel, H. and Wortzel, L.H. (eds) Global Strategic Management: The Essentials (New York: John Wiley & Sons).

Chapter 3

International Business Ethics David Kimber and Fran Siemensma

Introduction This chapter reviews frameworks of international business ethics and demonstrates the philosophical, social, political and organizational theories adopted in this programme and how they apply to business. The approach emphasizes self-awareness, using case study analysis, experiential exercises, reflective questioning and discussion. As ethics relates to all forms of personal and organizational decision-making, it is an essential element of business knowledge, one that may assist future managers to avoid the personal and organizational turmoil associated with the corporate collapses recently seen in Europe and the USA. The international applications of business ethics concern those who wish to work with multinational corporations or in any form of international business.

Values and Ethics Values and ethics are often claimed to be the fundamental basis of good business behaviour, both in boardrooms as well as operational areas of organizations only after fraud or financial disaster has shaken business practice and confidence. Ethical frameworks aim to demonstrate that business practitioners can be more successful over the longer term by taking a proactive rather than a reactive attitude to ethics. A definition of business ethics helps to position this discussion. Ethics can be defined as reflecting on the question ‘What ought I (we) do?’ In business, as in any context, this question is about making a decision and commitment to a course of action based on principles and beliefs. The concept of ‘ought’ is normative. It is not descriptive. It rather seeks to determine what ‘ought’ or ‘should’ mean in a specific situation. The notions of should and ought represent personal responsibility that is associated with the responsibility an individual fills as a result of their role in an organizational a certain time and place. For example, the issue could be: • the closure of a manufacturing plant in one country in order to relocate to a region with lower labour costs; • the development of an organizational culture dedicated to promoting and maintaining integrity. The aim being to ensure decisions are reached only after all ethical considerations have been addressed. In both cases, those responsible for making such decisions have to consider what the ‘right’ course of action is. This is a judgement that involves understanding all those who are affected directly or indirectly by the implications of that choice.

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Much discussion in business ethics centres round the resolution of ethical dilemmas. These involve the prospect of ‘bad consequences’ when, no matter which choice is selected, some ethical principles are likely to be violated. For example, the reduction of an organization’s workforce in order to avoid collapse has to be balanced against the hardships imposed on redundant employees. Corporations in a globalized world increasingly confront such dilemmas. Some cognitive dissonance may be reached to rationalize their decision and ease malcontents in the management tea. The management may justify their actions because they base their judgement and place trust in economists’ arguments that freed labour will transfer to other jobs and continue to add value to society. Values can be identified as one of the bases for determining ‘right action’. The values defined and described by a society, an organization, or held by an individual are likely to be reviewed to determine an appropriate policy or action. They will emerge from a number of viewpoints – moral philosophy (e.g., distributive justice), a political or social framework (beliefs underpinning democracy), or cultural heritage (values emerging from a Christian or Confucian understanding). Petrick and Quinn (1997, pp. 46, 48) identified different orientations to business ethics. They have developed a model which creates a typology of organizations, using two variables – flexible/control oriented and internal/externally focused. This enabled them to define four types of businesses which coincide with four orientations to business ethics. Table 3.1 summarizes their model. Table 3.1

Petrick and Quinn’s business ethics orientation model

Organization type

Business ethics orientation

Flexible and internally focussed

Virtue ethics

Control oriented and internally focused

Deontology

Control oriented and externally focused

Teleology

Flexible and externally focused

Systems ethics

This model summarizes the different orientations to business ethics which are discussed in this chapter. Virtue Ethics Virtue ethics is often associated with personal ethics. This approach, drawn from Aristotles notions relating to a ‘good life’1 is commonly identified with individual decision-making and behaviour. It involves questions such as ‘How should I act to become the person I want to be?’ or ‘How should I behave to lead a good life?’ These questions are commonly framed in terms of personal values and morality – the aspects of personality or character that drive one to behave in a ‘virtuous’ way. They were defined by Aristotle as ‘habits’ to be cultivated in order to be worthy of the status of ‘citizen’. The refined practice of such habits would lead to eudemonia, the happiness of a ‘good life’ pursued by all.

1 Aristotle, a Greek Philospher of the third century BC outlined, his understanding of what makes a ‘good life’ or ‘eudemonia’ in his writings, published under the title Nicomachean Ethics (2000, pp. 577–86).

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This orientation to ethics has an individualistic focus. Robert Solomon has reinterpreted virtue ethics for contemporary secular societies where many choose to pursue a professional career in business.2 In this context, ethical considerations, including the pursuit of personal identity and satisfaction, involve responsibilities associated with being an employee. Solomon, an American business ethicist, reworked Aristotle’s original virtue ethics to be applicable in an organizational setting, adapting the six dimensions to the moulding of the ‘character’ of an employee, manager or executive, rather than the citizen role to which Athenians aspired. The new virtue ethics are community, holism, role identity, excellence, judgement and integrity. Community Working individuals join organizations. These in turn provide income, status and a sense of identity. Organizations are ‘communities’ or ‘sites of mutual interdependency’ that fit within society. By agreeing to ‘belong’ to them, and signing on as an employee, individuals become responsible for preserving that community. Allegiance to one’s community is an element of personal identity and pride. Some individuals move from country to country, community to community and business to business. They may derive identity and pride by maintaining their network of contacts and learning. Career progression may require individuals to pursue job titles as a form of personal identity. Role identity  This dimension of virtue ethics encourages each individual to consider organizational role identity, and its associated duties, before choosing to act. Individuals are paid to fulfil specific duties and their associated responsibilities. Consider the different roles played by accounting, information technology, human resource management and marketing within a company. To be effective, each employee must behave as required to fulfil specific role requirements. There may be role conflicts either between role fulfilment within an organization or between one’s role as an employee and for example that of a parent, sibling or citizen. Excellence  To act ‘virtuously’ in an organization, individuals must do their best and seek to excel, not merely comply at the lowest level. Peters and Waterman emphasized the importance of this theme in business in their book In Search of Excellence (2004). This approach shows how organizations are able to survive, and even thrive, in a competitive environment. As a personal philosophy, it encourages individuals to be fully and creatively engaged in their work. Holism  This dimension requires each individual to recognize and apply core human values. These include respect for life and the rights of strangers to the decisions they make in their working lives. Holism encourages managers and decision makers to treat the rights and needs of their employees, suppliers and customers as respectfully as they would those of their family and friends. Judgement  The ability to judge effectively is an essential business ‘virtue’. It is a product of upbringing, education and professional development. Managers and decision makers are continually required to master facts and approaches so that they may make sound judgements. Solomon sees this as the ‘linchpin of all the virtues’ because it seeks to balance and mediate conflicts. Integrity Solomon regards integrity as the ability to demonstrate ‘courage under fire’, where people display the ability to act properly when core principles are threatened. In the context of 2 For further details of Solomon’s writing on virtue ethics see Solomon (1993).

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the individual’s corporate duties and responsibilities, integrity is demonstrated when someone knows whether to ‘conform’ to organizational demands or to ‘rebel’ against them. Managers possessing integrity in this sense will make the hard decisions, will be prepared to face up to difficult situations and will acknowledge ethical dilemmas. Virtue ethics, as identified above, reflects an approach that is most appropriate in organizations where flexibility is required and personal autonomy is high. The types of organizations that strongly emphasize virtue ethics are likely to be consulting firms and accounting and law practices. Virtue is a powerful and pertinent area of ethical analysis for senior executives – CEOs and board members. Corporate scandals and collapses often are associated with organizations whose senior managers seemed to disregard the concerns outlined above in virtue ethics. Deontology Deontology is the arena of ethics associated with seeking to answer the question ‘Is it right?’ and searches for ‘rightness’. Traditionally, deontology has involved reference to a set of principles, defined ‘rights’, duties, or obligations. In a business sense, it has become associated with adherence to appropriate rules and regulations and their associated processes. Hence, an organization that emphasizes a deontological approach to ‘right’ behaviour is likely to be, in Petrick and Quinn’s terms, control oriented and internally focused – such as a hospital, a prison, or a bank. Such organizations have a clear and well defined understanding of their principles and are able to manage and create ‘ethical’ behaviour because they create guidelines on how the principles should be upheld and implemented. Examples include: • hospitals making people well; • governments agencies that protect society; • financial institutions that manage depositors’ funds prudentially. Kant’s ‘categorical imperative’3 is another example of deontology. According to this perspective, one can determine ‘right action’ by reflecting on whether or not that behaviour should be universally applied. This could be determined by referring to three ‘laws’: 1. ‘act as if the maxim of thy action were to become by thy will a universal law of nature’; 2. ‘act that you use humanity, whether in your own person or in the person of any other, always at the same time as an end, never merely as a means’; 3. ‘act that we may think of ourselves as legislating universal laws through our maxims’.4 Thus, the determination to act in a certain way is based on the judgement that the decision taken would become a moral obligation for every person facing the same circumstances, based on the respect due to every human being. In the business context, Kant’s categorical imperative can help resolve questions about whether to purchase goods made by indentured labour or that cause environmental damage. 3 Emmanuel Kant was an eighteenth century German philosopher who established a framework for deontology, breaking away from doctrinal thinking which emanated from religion and suggesting that logic and reasoning could clarify guiding principles. 4 See the Wikpedia website on Kant http://en.wikipedia.org/wiki/Immanuel_Kant, accessed 24 February 2006.

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‘Kantian’ corporate directors recognize that the implications of decisions reached should be morally and universally compelling. Roles and responsibility – principles and process  The increased reliance on regulation as a means of improving corporate governance recently has given deontological approaches greater and wider prominence. There are two significant reasons for this increased recognition. Firstly, with globalization and the growth of multinational corporations, initiatives have emerged to regulate and control business behaviour. Responses range from aspiration based principles being expressed by groups such as the UN,5 and The Caux Round Table6 attempts to regulate MNC activities through home country legislation such as anti-corruption legislation or the US laws prohibiting American corporations from engaging in corruption in foreign countries.7 The aim is to raise awareness and thus discourage business managers from undertaking activities incompatible with good business and social justice around the world. Secondly, since the corporate collapses in 2000–2001 (Enron, WorldCom, Parmalat and Arthur Andersen) several different countries have passed legislation to encourage directors and executives to act more ‘ethically’. The Sarbanes Oxley Act8 in the USA places particular emphasis on compliance practices in corporations. Such processes are being developed and instituted to increase the confidence of shareholders and other stakeholders in corporations. One example is the legal requirement that senior executives now personally endorse accurate annual statements relating to solvency, transparency and accountability. Both approaches noted above aimed at promoting good business behaviour can be seen as grounded in deontological theory. Teleology Teleology is the study of the end or purpose of things.9 In the ethical context, it involves the pursuit of the best outcome. The question involves the notion of ‘good’ understood as the best possible result of an action or decision. It is a term derived from the two Greek words, telos. meaning ‘purpose or end’ and logos, meaning ‘word’. It is often seen in terms of individualism from two perspectives – first, the ‘self’, often known as ethical egoism – ‘what is best for me’ and second, the ‘other’ – altruism, ‘what is best for the other(s)’. John Stuart Mill10 suggested that teleology can also relate to ‘the group’ – utilitarianism, ‘what is best for all of us’. He described an ethical action as that which produces ‘the greatest good for the greatest number’. 5 See The Global Compact website for details of 10 business principles which the UN is encouraging multinational corporations to follow: http://www.unglobalcompact.org/, accessed 20 February 2006. 6 See The Caux Round Table website for details of business principles promulgated by the Caux Round Table Council: http://www.cauxroundtable.org/, accessed 20 February 2006. 7 See International Anti-Bribery and Fair Competition Act of 1998, http://usinfo.state.gov/usa/ infousa/laws/majorlaw/antibrib.htm, accessed 20 February 2006. 8 The Sarbanes Oxley Act or SOX was legislated in the USA in 2002. It was a response to major corporate failures which took place in 2000–2001. It has had considerable influence on emphasizing the role of corporate governance in the management of corporations. For further details and discussion see http://www.sarbanes-oxley.com/, accessed 20 February 2006. 9 See website dictionary definition www.theapologiaproject.org/glossary.htm, accessed 20 February 2006. 10 John Stuart Mill was a nineteenth century English philosopher who was the prime proponent of and writer on the concept of utilitarianism. For further details see http://www.utilitarianism.com/jsmill. htm, accessed 24 April 2006.

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This way of conceptualizing ethics is also known as consequentialism. Emphasis is on ‘What are the consequences of my/our actions?’ In business, much decision-making is concerned with outcomes such as how to improve profitability, how to increase sales, how to make products that consumers want or need. The goal-oriented focus of many business decisions corresponds with teleology. Business managers tend to be comfortable with this approach Tensions emerge when business decisions have different impacts on stakeholders, especially when they create winners and losers. Executives continually have to make decisions that must be balanced in terms of their outcomes. Those who understand teleological analysis and practice it, consciously taking account of the impact on all stakeholders, are likely to be seen as ethical decision makers. Those who are unable to foresee the inevitable ‘unintended consequences’ of decisions are more likely to be tripped up by unwanted and unexpected ethical dilemmas. Conversely, considerable tension in organizations can emerge because managers are conscious of outcomes. Decisions, that seen ‘too hard’ may be shelved. The drive for self-preservation may mean that people seek to avoid responsibility because of their awareness of inevitable ‘bad’ outcomes. Often ‘good’ managers, those who can ‘just do it’, are those prepared to make ‘the tough choices’. Equally, the situation in which they find themselves may permit them to direct actions of others that they themselves wouldn’t undertake. The question of who has responsibility for the strategy and who is responsible for ‘getting the job done’ may be divorced. This can permit a level of cognitive dissonance to creep into the decision-making process and commitment to tasks. Given that business demands that decisions must be made, when they are made ‘consciously’ and recognize all consequences, the chance of balanced outcomes is increased. Anticipated tangible results of actions may be assessed using decision-making tools such as cost/benefit analysis or SWOT11 analysis. Hence, this approach to ethics is appropriate when organizations undertake strategic planning, risk assessment and performance monitoring and evaluation. It is also directly connected to stakeholder theory, a theme discussed below. Systems Ethics As business systems and processes become more complex and supply chain networks enable improved organizational performance, a systemic approach to ethics has also become more necessary. This area involves ways that an organization develops and maintains its ethical culture. The approaches covered by virtue ethics, deontology and teleology together combine to develop an appropriate and effective ethical culture. This approach is described as the formulation of an integrity system for an organization. It is a relatively new field of organizational development that is increasing in importance as establishments either works jointly in different countries and regions. Systems ethics can be seen from both an internal and external perspective. Internal systems relate to the development, within organizations, of: • • • • •

codes of conduct; clear structures and systems which encourage ethical behaviours; ethics training and development for both managers and executives; ethics monitoring and reporting; and ‘whistleblower’ protection.

11 Undertaking a scenario planning which identifies the Strengths, Weaknesses, Opportunities, Threats which emerge from each set of decisions.

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External systems within countries relate to: • effective legal systems; • appropriate public service agencies which encourage integrity in public policy; • well developed oversight agencies, that protect the rights of the public in both the public and private sectors. Following the corporate collapses noted above, corporate law enforcement in many countries have been strengthened. Research in this field suggests it is approached with different levels of intensity and interest in different countries and in different industries.12 Another theme of systems ethics relates to the increased economic and social significance of multinational corporations. A more holistic notion of systems theory considers the interaction between economic, socio-cultural and environmental systems both locally and globally. This ethical approach to organizations involves themes such as corporate social responsibility, sustainability and ‘triple bottom line’ analysis. Ethical Decision-making in Business – An Integrated Approach Drawing on the above analysis, an appropriate approach to making ethical decisions takes all perspectives into account. All ethical theories are interrelated. If applied in isolation they cease to be effective. Personal values and behaviour, principles and processes, impacts and outcomes and overall systems must all be considered before making business decisions. In response to the basic initial question ‘What ought to be done?’, the subsidiary questions, could be considered in sequence, starting from those related to virtue ethics. This highlights the need to recognize the micro, personal ethical position, through the organizational impact, to systemic considerations and social/environmental implications. Depending on the situation, the sequence could start at either the individual end (virtue ethics) or from the worldview perspective. If managers followed this process of analysis, they are likely to diminish the risk of making short term decisions which threaten sustainability. Personal values and behaviour, principles and processes, impacts and outcomes and overall systems must all be considered before making business decisions. In response to the basic initial question ‘What ought to be done?’, the subsidiary questions, noted in Figure 3.1, could be considered in sequence, starting from those related to virtue ethics. This highlights the need to recognize the micro, personal ethical position, through the organizational impact, to systemic considerations and social/environmental implications. Depending on the situation, the sequence could also start at either the individual end (virtue ethics) or from the world view perspective. If managers followed this process of analysis, it would likely decrease the risk that stems from short-term decisions that are not sustainable social or when economical consequences are not foreseen.

12 See Transparency International, http://www.transparency.org/, which considers the role of corruption in public and private sectors and the impact on social systems. TI is a non-government agency set up to help counteract corruption in the world.

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How should I behave to have a good life?

Will the decision work?

How should I behave as a member of an organization?

Is the action fitting?

How should I behave as a member of society?

Can a process or system be devised to ensure it is systemically maintained?

Is it ‘right’?

Is it ‘good’?

What are the principles, laws, rules or regulations which guide my/our actions?

What are the consequences?

Who will gain or lose, suffer or benefit?

Figure 3.1

A decision-making diagram

Stakeholder Theory Stakeholders are increasingly recognized by corporations as influencing relates to good business ethics. The concept of ‘stakeholder engagement’13 describes the interaction of an organization with members of a number of groupings. These include those who have a direct economic relationship as well as those who have an indirect involvement and interest in the entity’s activities. Stakeholders are characterized in two groups, namely, primary (direct) and indirect (secondary): Primary–Direct: • financial investors; • shareholder/security holders; • banks and other finance providers; 13 For more detailed discussion regarding the stakeholder concept, see http://en.wikipedia.org/wiki/ Stakeholder_concept, accessed 24 April 2006.

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• employees – management/non-management; • customers and suppliers; • government bodies such as the taxation department and business or corporate regulation agencies. Indirect–Social: • local communities, represented by local and state government agencies and lobby groups; • regional, national and global communities, represented by non-government organizations (NGOs), churches, lobby groups etc. Indirect–Environmental: • government agencies such as environmental protection and planning authorities; • non-government bodies representing environmental interests – NGOs, research institutes, etc. Business most commonly considers direct stakeholders. Such interests may be represented by others, for example, directors acting on behalf of shareholders. The interests of direct stakeholders can be positively influenced by an organization’s actions. Consequently, while seeking to ensure protection, they are keen to see business in a positive way. However, the environment and the community are more likely to limit or control the impact of business growth. In the past these interests often have been ignored or negatively affected by business decisions. For this reason the environment is often referred to as the ‘silent stakeholder’.14 Advocates often act on behalf of social or environmental threats, especially those posed to future generations. The growing power and concern of such people or groups has forced business managers to become increasingly sensitive to critics portrayed as primarily ‘negative’ influences, who oppose their decisions. Decision makers who apply stakeholder theory may come to realize that negotiating with those stakeholders who could frustrate their business purpose is as important as gaining support from, say, financial backers. The Figure 3.2 identifies the relationships between a business and its stakeholders. Whilst the stakeholders in the outer circle both can be direct and indirect, those relating to the social and environmental considerations tend to be represented by advocates. Sustainability, Corporate Social Responsibility (CSR) and the ‘Triple Bottom Line’. Traditionally businesses ‘accounted for their actions’ by producing annual financial reports. Such documents show the economic impact – companies’ profits or losses and their status in terms of assets and liabilities at a given point in time. Growing concerns about the social and environmental impact of business and the sustainability of current patterns of production and consumption have increased the demands that business must take a broader view of its impact. As such there have been growing calls for corporations, especially those operating globally, to incorporate social and environmental, as well as economic, responsibility as part of their mission.

14 See also discussions relating to sustainability at http://en.wikipedia.org/wiki/Sustainability, accessed 24 April 2006.

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Triple Bottom Line View of Stakeholders Employees and their families

Waste and by products Rivers and Streams

Air

NGO’S and Volunteers

Physical resources used by organization Suppliers/ customers

Figure 3.2

Government officials

Government officials

n t Soc i o Business al r i v Impact En Economic e nm

Local communities, towns and villages

Unions

NGO’S and Volunteers Regional, national and global Directors, government communities officials and professional associations Shareholders/investors bankers

Government Depts –Tax Office

A stakeholder map

Such concerns led to the concept of the ‘triple bottom line’, namely that businesses should report on their social and environmental activities and the financial ‘bottom line’.15 Such disclosure has proved difficult and little headway has been made to introduce standards for reporting such broad scale data. However, there is a growing recognition of the need, and the feasibility, for CSR16 as a basis of ensuring sustainability. Figure 3.3 identifies the relationship between the concepts of the triple bottom line, corporate social responsibility and sustainability.

Conclusions In the final analysis, ethics is essential for individuals, business corporations and well functioning societies. People who maintain high standards of personal ethics are often noted as those who are able to ‘sleep well’ – they are confident and happy that their behaviour is well founded and will not lead to future dilemmas. This notion is often related to the ‘sunshine test’ which suggests that an action or decision should be avoided if its disclosure would lead to embarrassment or shame. Organizations known for their high standards of ethics often are identified as those people are proud to work for. In that sense they become ‘employers of choice’. Most employees prefer to work for ethical organizations and are attracted to them. They are likely to be easier and 15 The term ‘triple bottom line’ was coined by John Elkington in his book Cannibals with Forks: The Triple Bottom Line of 21st Century Business (1998). 16 CSR (corporate social responsibility) is the term used by a growing community of academics and social commentators who are critical of the focus on business on serving its primary stakeholder, in particular the shareholders. For further details relating to this debate see http://en.wikipedia.org/wiki/ Corporate_Social_Responsibility, accessed 25 April 2006.

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International Business Ethics Sustainable Societies

Corporate Citizenship and Social Responsibility

Triple Bottom Line Reporting

Finance

Environment

Social

Corporate Social Responsibility Practices Promoting Business Ethics, Economically Responsible Investment, Supporting Human Rights, Good Labour Practices, Environment Protection, CSR Reporting, Stakeholder Relationship Management, Community Development, Philanthropy.

Figure 3.3

A sustainability diagram

more pleasant places to work in as the behaviour of others usually is predictable and based on socially accepted norms. When ethical behaviour becomes the norm in societies are inevitably more harmonious, predictable and enjoyable environments to live in. Each citizen leads a ‘good life’. Social capital is high and people enjoy high levels of social trust.17 Businesses function effectively and people are able to develop positively and to their best ability in such environments. As far as business is concerned, product and service reputation, customer and vendor preferences, employee recruitment and retention, financial market recognition, international partnering and so on, all testify to the need for good social standing. The creation of corporate wealth, important as it is, is admired only when it is achieved in ways judged to be ethical, fair and legitimate. The oft-cited maxim that the ends do not justify the means is never more amply demonstrated than in the market assessment of a corporation’s business behaviour. Usually, scandals and financial crisis are found in corporations which have lost touch with business ethics. As evidenced in the last decade, they often decline significantly or collapse. Alternatively, many well-regarded corporations that suffered business downturns or have even blundered strategically are more likely to be supported by the markets and their shareholders. In the final judgement, it can be seen that many were given the time or the money to recover because they were admired and respected for doing the right thing.

17 Social capital and trust are terms which have been identified with good ethics in society. For further details see http://en.wikipedia.org/wiki/Social_capital, accessed 24 April 2006.

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References Aristotle (2000), Nihomachean Ethics, in ed. Cohen, S.M., Curd, P. and Reeve, C.D.C. Readings in Ancient Greek Philosophy (Cambridge, MA: Hackett), pp. 577–86.  Elkington, J. (1998), Cannibals with Forks: The Triple Bottom Line of 21st Century Business (Gabriola, BC: New Society Publishers). Peters, T. and Waterman, R. (1982), In Search of Excellence: Lessons from America’s Best-Run Companies (New York: HarperCollins). Petrick, J.A. and Quinn, J.F. (1997), Management Ethics: Integrity at Work (Thousand Oaks, CA: Sage Publications). Solomon, R.C. (1993), ‘Corporate Roles, Personal Virtues, Moral Mazes: An Aristotelian Approach to Virtue Ethics’, in Coady, A. and Sampford, C. (eds) Business, Ethics and the Law (St Leonards, NSW: Federation Press), pp. 24 –51.

Dimension 2 Relationship Management

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Chapter 4

Inter-Firm Collaboration and Partnering: A Key Competence to Satisfy Demand Maria Veludo

This chapter examines literature from several fields of research and models a wide range factors relating to inter-firm collaboration and partnering. Clarifications are provided to order the development process of inter-firm collaboration and partnering. Definitions of inter-firm collaboration and partnering are considered. This provides the reader an idea of the complexity of these concepts. Then it will review main contributions of some theoretical perspectives to the understanding of these topics. These are the resource-based view theory, transaction cost analysis and network theory. This chapter then provides a brief overview of partnering related issues, including disciplinary perspectives, characteristics and influencing factors. The understanding of the partnering concept is important for the manager’s decision-making process. Rui Pinho (Managing Director of Group Ficosa)

Introduction Anderson, Håkansson and Johanson (1994) relate the primary functions of the relationships between buying and supplying companies to actors, resources and activities on the basis of: (a) efficiency through interlinking of activities; (b) creative enhancement of resource heterogeneity; and (c) mutuality based on self-interest of actors. These functions appear to have common features with those associated to the partnering concept. Lambert, Cooper and Pagh (1998) asserted that the inter-related nature of supply chain management includes three inter-related elements: (a) the structure of the supply chain; (b) the supply chain business processes; and (c) the supply chain management components. The supply chain structure consists of the network of members and links between the firms. Business processes are the activities that produce a specific output of value to the customer. The management components are the managerial variables by which the business processes are integrated and managed across the supply chain. Partnering is a central construct in supply chain management (SCM) and has been used as the basis of the dyadic relationship perspective. It is not, however, used in the network perspective. In the framework that this researcher proposes, partnering provides a bridge between the dyadic and the network perspectives. This is done by structuring the defining characteristics of partnering in such a way that they are translated into actor bonds, resource ties and activity links, which are concepts associated with the network approach.

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Buyer–Supplier Relationships A great amount of research on buyer–supplier relationships (BSR) has focused on the need for closer relationships between buyers and suppliers (Lamming 1996). Most arguments start with Coase’s (1937) theory of the firm and Williamson’s (1975) transactional economics. The concepts of inter-organizational relationships (Van de Ven et al. 1975) are at the basis of the development of a ‘network concept’ that has been designed to surpass supply chains (Lamming 1996). Research interest relating to inter-firm collaboration and partnering has accompanied the many changes and competitive trends in recent years, particularly championed by the world’s automotive assembly giants. They have created competitive forces that oblige many firms now to continually review how they add value and reduce costs. These changes and trends include increased globalization of both sources of supply and markets and higher levels of quality consciousness (Hendrick and Ellram 1993). The companies must act as a cohesive entity, learning from each other, transferring staff and equipment between them, reducing costs, improving coordination and process efficiency, designing products to suit their production processes and ensuring adequate supply to the assembly plant and after-market spares and repair workshops. Above all, management of each firm must accept that they do not operate in isolation: no single company can develop, produce and deliver all parts and own the processes to produce the goods and services their clients require. Networks of companies now compete against other networks in the marketplace. The businesses that make up these networks may supply more than one trade customer or assembler. They have to improve performance against a myriad of key indicators, or they face losing market share to competitors as a result of dual or like-for-like purchase policy decisions to switch supply to more competitive suppliers, or entirely lose the contract for the next product variant. Womack, Jones and Roos (1990) asserted these changes have created conditions for sustainable cost reduction programmes, quality improvement initiatives, inventory reduction programs, early supplier involvement in product design and an increased emphasis on cycletime reduction. Japanese firms, followed by Western companies, found that a way to reduce costs was to work more closely with their suppliers. The philosophical underpinnings of this approach can be designated by: • collaboration and cooperation (Young and Wilkinson 1997); • closeness (Ford 1998); • partnership, partnering, strategic alliance (Spekman 1988) or co-makership (Bevan 1987); and • Deming’s (1986) 14 points on quality. These were developed in the late 1940s. Deming argued that firms should work more closely with fewer suppliers to facilitate communication flows and to achieve the maximum of synergy from their relationship.

Partnering Literature does not seem to provide a coherent picture of partnering. The study of partnering resulted in a degree of frustration for this researcher, as definitions and characteristics are broad and idiosyncratically selected by researchers dependent on their particular background or area of research. Moreover, much of the literature uses terms like ‘partnering’, ‘partnership’ and ‘collaboration’ interchangeably, adding to the broadness and confusion surrounding the term

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itself. This reveals a patchy understanding of the nature of the concept and of how it operates. Hill (1996) summarizes the topic by stating that partnering is the relationship between two organizations in order for them to survive within the marketplace. For the purposes of this review the researcher will explore the broadness of the concept that guide the remainder of the chapter. This section will provide a short overview of: (a) partnering related literature; (b) disciplinary perspectives on partnering; (c) partnering characteristics; and (d) influencing factors on partnering.

Disciplinary Perspectives on Partnering This section will discuss the way in which partnering has been viewed within a variety of disciplines with an interest on the topic. In this way, the researcher expects to (a) give to the reader the disciplinary contexts in which inter-firm collaboration and partnering have been studied and (b) identify where further research is required and the broad principles of how it should be conducted. Much of the literature written on inter-firm collaboration and partnering can be traced to three disciplines: supply chain management, purchasing and industrial marketing. Supply Chain Management The concept of supply chain management (SCM) has its roots in the 1960s concept of logistics management (Lazzarini et al. 2001) and has evolved since then. The concept of SCM has been used to represent a variety of different meanings, some related to management processes, others to the structural organization of businesses (Harland 1996). Lazzarini, Chaddad and Cook (2001) found that, despite divergences that may exist on its conceptualization, the literature on SCM has generally emphasized the role of management to coordinate the flow of products, information and decisions in supply chains in order to minimize costs, optimize production flows, or capture value along the chain. Despite this view on SCM, it seems that the term ‘supply chain’ is increasingly giving place to ‘supply network’, which takes into account the complex non-linear network of relationships that exists for any product or service that is provided for an end customer (Cox et al. 2001). According to Harland, Lamming, Zheng and Johnsen (2001), the supply network concept appears to be more complex than the traditional supply chain concept. They argued that, whilst SCM tends to concentrate on more simplistic, linear, and unidirectional flows of materials and associated information, supply networks encompass the complexity of networks involving lateral links and two-way exchanges. Christopher (1998) recognized a lack of precision in the term ‘chain’, suggesting that the term ‘network’ is more realistic and that ideally it should be ‘demand’ and not ‘supply’. However, for Christopher, more important than the words is the way firms manage upstream and downstream relationships with suppliers and customers on an integrated basis. The distinction between supply chain and supply network seems to become clearer when taking into account the different levels of analysis within supply chain management, as considered by Harland (1996). These are: • the internal supply chain, which integrates business functions involved in the flow of materials and information within the firm; • the dyadic relationship level, which involves the management of dyadic or two-party relationships with immediate suppliers;

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The Global Business Handbook • the external chain level, with the management of a chain of businesses also being described as a pipeline;1 and • the inter-business network level, which relates to the management of a network of interconnected businesses in the supply of products and services.

For Christopher (1998), one of the most significant breakthroughs in SCM thinking has been the realization that individual firms no longer compete as stand-alone entities, but rather as supply chains (as formed by suppliers and alliance partners). Christopher views the opportunities for achieving sustainable competitive advantage through the supply chain, which he believes are considerable, as the basis for competition switches from the individual firm to the network. He further suggests that in today’s increasingly global markets, the way to reach sustainable competitive advantage lies in managing the complex web of relationships that link highly focused providers of specific elements in a cost-effective value-added chain. In the view of Stock and Lambert (1992), this can be achieved only if traditional adversarial relationships between channel members are abandoned and replaced by a partnership based on mutual trust and the desire to increase performance within the entire pipeline. Chopra and Meindl (2001) reinforce this idea, arguing that effectively managed supply chain relationships foster cooperation and thus support increasing supply chain coordination. This importance given to relationships is demonstrated by the increasing emphasis on the establishment and management of supply chain partnerships (Wyatt 2001). Partnerships are increasingly viewed in terms of the dyadic relationships between two organizations, and also as core elements of competitive advantage in supply networks (ibid.). Ellram (1991) recognized that the relative ‘newness’ of supply chain management and its multidisciplinary nature had resulted in difficulties for researchers in the area. This view is shared by Monczka and Morgan (1997), who emphasize the fragmentation that exists within the discipline and assert that, after almost a decade of existence, supply chain management continues to be a poorly understood, badly explained and wretchedly implemented concept. In relation to partnering research, Stannack (1997) states there is, as yet, no comprehensive model that can be used to explain inter-firm relationships. For Stannack, as a result, partnership strategies may well be self-defeating. Purchasing Today, moves towards collaboration have expanded the approach taken by purchasing to supplier management and supplier development activities (Wyatt 2001). However, much of the literature on partnering within the purchasing domain reflects the enduring belief in the dominant role of the buyer in buyer–supplier relationships (ibid.). For instance, supplier development practice, which is associated to a collaborative approach (Krause and Ellram 1997), has its essence in an active partner (the buyer) who puts resources into improving its suppliers (New and Burnes 1998). As a consequence of this buyer-centric perspective, much of research on partnering has tended to focus on the role of the customer in establishing and managing partnering relationships (ibid.). The purchasing discipline is itself dominant in the research of buyer–supplier relationships and partnering in particular, producing the most papers and owning highly respected journals (Wyatt 2001).

1 The term was introduced by Farmer and van Amstel (1991).

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Industrial Marketing Over the last two decades research in industrial marketing has moved steadily away from an emphasis on analysing organizational purchasing decisions in discrete transactions to the study of how organizations interact in industrial markets. In a brief literature review, Ford (1980) considered that the majority of the research in industrial marketing, particularly in the US, had fallen into a general research tradition, which he labelled the ‘industrial buying’. This approach focused on two main areas: (a) the understanding of the industrial purchasing decision and the supplier choice process; and (b) the understanding of the impact of different elements of the marketing mix on industrial markets. He also mentioned a tendency to isolate the study of the industrial buying process and industrial marketing activities, rather than look at the interplay between the two. Dissatisfaction with this state of affairs, and the recognition of the importance of interdependence of buyers and suppliers in industrial markets, led to a new approach to the study of industrial marketing and purchasing that attempted to redress some of the imbalances pointed out by Ford. One of the starting points of the new approach, labelled the ‘interaction approach’, was to view the process of industrial marketing as ‘the mirror image of the industrial purchasing process and to look at the interaction between two active partners in a buying/selling episode’ (Araujo 1990, p. 29). A significant legacy of this approach is Håkansson’s (1982) interaction model. According to the interaction approach, each interaction between companies, whether for product, service, financial, social, or information exchange, is an episode within the relationship between the companies. Each episode within the relationship (which may be close or distant, complex or simple) is affected by the relationship and in turn may affect the relationship itself. The relationship between the companies consists of learned rules and behaviours that provide the atmosphere within which interaction takes place. Individuals will approach each episode on the basis of their experience within the relationship and elsewhere and on the basis of the values that they hold, both in general and in regard to the particular relationship. The interaction approach has introduced the concept of atmosphere to capture the subtle co-existence of conflict and cooperation within a business relationship (Håkansson 1982; Turnbell and Valla 1985). There have, of course, been criticisms of the interaction approach, among which are that it demonstrates ‘the tendency to over emphasize harmony in buyer–seller relationships and neglect, to some extent, the disruptive impact of competitive forces on a relationship’ (Ford 1980, p. 236) and that it offers very little guidance on adaptation decisions (Brennan and Turnbull 1998). Wyatt (2001) noticed that its application to the study of the European automotive industry has been limited. According to Wyatt, that the model also has a theoretical basis as it was developed from concepts and assumptions taken from inter-organizational theory and new institutional economics as well as trends in marketing and purchasing literature. Based on the knowledge accumulated in the study of exchange relationships in industrial markets, and recognizing the limitations of a dyadic level of analysis, a number of Swedish researchers proposed a ‘network approach’ to the study of industrial systems (Johanson and Mattsson 1987). The network approach has become a major research direction in industrial marketing (Cheung and Turnbull 1998). This is due to the fact that more and more researchers in industrial marketing are aware that dyads are only part of an overall picture and that with a dyadic approach the network view is lost, since connectedness is assumed away (Backhaus and Buschken 1997. According to Purchase (2000), researchers (Axelson and Easton 1992; Araujo and Easton 1996) within the network approach have begun to consolidate their research around the actors-resources-activities (ARA) model originally developed by Håkansson and Johanson (1992) and further extended by Håkansson and Snehota (1995). The ARA model was

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developed to describe industrial networks and to integrate network stability and development into a single model. The network approach adds to the interaction approach the awareness that the focal relationships cannot be managed in isolation from a firm’s other relationships (Moller and Halinen 1999) and that these focal relationships represent a conduit to other relationships through which resources may be accessed (Easton 1992). The network approach emphasizes cooperation, complementarity in relationships and coordination. Within this approach, cooperation depends on the relationships between the firms’ objectives. For Easton, competition and cooperation are two ‘dialectical processes in networks’. He considered two types of cooperation: (a) instrumental, in that each firm seeks to gain different ends from the same means; and (b) complementary in the objectives both parties held. The author assumed that firms buying and selling from one another have to have a minimum level of cooperation. According to Low (1997), the network structure and the positions occupied by the actors in the network are a result of mutual cooperation and adaptation. Easton (1992) and Easton and Araujo (1992) have included both vertical and horizontal relationships in network analysis. Horizontal, competitive interactions are mediated by vertical, cooperative relationships between buyers and suppliers. The recognition of the interdependence between horizontal, competitive relationships and vertical buyer–supplier relationships reinforces the argument for moving beyond a dyadic to a network level of analysis. According to Johnston, Lewin and Spekman (1999), the complexity of relationships increases when business relationships occur at an international level. From an industrial network perspective, internationalization of the firm means that the firm establishes and develops network positions in foreign markets (Johanson and Mattsson 1987). For Fletcher and Barrett (2001), in the international business context, business transactions are embedded in networks of relationships that cut across cultural boundaries. In addition, they observed that these relationships, in turn, are embedded in different national as well as global business environments. Furthermore, these environments include social networks, institutional networks and market networks. This means that: (a) there are likely to be differences in the political environment; (b) there will be different institutions and organizations to deal with; and (c) the nature of the market is likely to be different. Johnston, Lewin and Spekman (1999) believe that a changing global environment is forcing firms to move closer to their exchange partners, form international alliances and participate in complex multinational networks.

Partnering Characteristics Studies have been conducted that look at the nature of partnering in terms of its main characteristics. Academics have been describing the boundaries of partnering by defining the concept through the consideration of the so-called dimensions, attributes, features, critical success factors or indicators of partnering success. The identification in the literature of the defining characteristics of partnering is not an easy task, because different authors use different constructs to express similar ideas, which creates methodological problems in establishing comparisons and in looking for similarities. Perhaps this happens because the literature on partnering characteristics does not appear to represent a common stream of research. In spite of the divergences concerning the key characteristics of partnering, some commonalities emerge. Authors appear to converge to consider joint work, sharing of resources and mutual benefits as key defining characteristics of partnering. Key partnering characteristics extracted from literature and respective authors include:

Inter-Firm Collaboration and Partnering Table 4.1

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A framework for understanding partnering

Dimension(s)

Characteristic(s)

Indicator(s)

Commitment

Formal commitment

Type of contracts

Trust

An inherent trust

Type of contracts Negotiation Ordering procedure Technology transfer Quality inspection Information disclosure

Win-Win

Sharing of risks Sharing of benefits Increase in joint competitiveness

Long-term orientation

Expectation of continuity

Type of contracts Substitutability of suppliers Length of contracts Information disclosure on long-term forecasting Assessment schemes

A continuous improvement focus

Multi-functional teams Assessment schemes Payment performance Cost reduction projects

Supplier development

Supplier development programme

Joint strategy setting

Coordination

Joint planning

Planning product mix Management of capacity Joint cost planning

Joint R&D

Joint design Prototyping Joint product development Joint process definition

Two-way communication

Channels of communication Frequency of interaction

Joint problem-solving Willingness to help one another Personnel allocation Conflict resolution Flexibility

Two-way flexibility

Flexibility in agreements Flexibility in delivery

A reduced supply base

Proportion of buyer total demand provided by the supplier Importance of this item/product class to buyer Number of suppliers for this item/product class bought Number of alternative sources

A reduced customer base

Supplying on an exclusivity basis Proportion of buyer’s purchases

Mutual dependence

50 • • • • • • • • •

The Global Business Handbook commitment communication: two-way communication conflict resolution continuous improvement focus flexibility information disclosure and sharing joint planning joint problem solving joint R&D

• • • • • • • • •

long-term orientation mutual dependence sharing benefits sharing risks sharing goals supplier development trust willingness to help one another win-win

Based on these characteristics, this researcher developed a framework for partnering that is illustrated in Table 4.1. This framework was developed by the researcher to provide guidance in exploring and analysing partnering relationships and thus aid further discussion. In this framework the dimensions correspond to the defining features of partnering, that in turn can be defined though a number of characteristics. It is not the objective of the researcher to explore in detail what has been written on each construct that would extend this thesis beyond what the researcher believes to be necessary to the understanding of the concept of partnering following a constructivist and grounded approach, and as a basis for the fieldwork. Factors Influencing Partnering In the literature there is a lack of emphasis and of a clear distinction between the factors that motivate the choice of a partnering relationship-type (i.e., the motivational aspects of partnering or partnering drivers), the factors that influence partnering as a dynamic process and the success factors of partnering implementation. The researcher proposes in this section to bring some insights into these factors and briefly discuss the work that has been developed. Partnering Drivers Empirical studies have indicated a wide variety of driving forces behind the development of partnering relationships (Hendrick and Ellman 1993). These drivers are not mutually exclusive and a participant can manifest more than one at different times or in different circumstances (Ford et al. 1998). According to some authors, partnerships are motivated primarily to gain competitive advantage (Mudambi and Helper 1998; Vlosky et al. 1998) through the development of potentially important synergies between firms with different capabilities (Dodgson 1992). According to other authors, although partnering relationships can be implemented for a variety of strategic and operational goals (Ellram 1991; Monczka and Trent 1991), it is agreed that the improvement of the product development process and access to innovative technologies are of paramount importance (Håkansson and Eriksson 1993). Firms may choose to collaborate with respect to some goals and not with respect to others (Young and Wilkinson 1997). This may explain the myriad ways in which buyer–supplier partnerships begin and are developed (Hendrick and Ellram 1993). For example, a partnership focused on the trading partners with a long-term horizon differs from a project-based partnership; in this case two firms may jointly work towards a common goal and dissolve their agreement after achieving the goal. The main drivers or motivations for partnering (i.e., partnering drivers) emphasized in the literature include:

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• linking of the complementary contributions of the partners in the value chain (e.g., access to technology, materials, labour and capital) (Contractor and Lorange 1988); • the promotion of synergies between firms with different capabilities (Dodgson 1992); • the development of partnership philosophy appears as a result of firms’ need to reduce costs (Cousins 1994); • better integration of design efforts, improvement of specific areas, increased stability of supply (Mudambi and Schrunder 1996); • technology is increasingly the focus of collaboration. However, there are broad differences in the actual focus of collaboration between industries. In some industries the focus can be in product development and in others it can be in process development. Moreover, the focus of collaboration changes over time, sometimes with product life cycles (Beecham and Cordey-Hayes 1998); • cost reductions, improves product quality, productivity and lead-time (Langfield-Smith and Greenwood 1998); • ultimately firms are driven by the desire of greater competitive advantage (Mudambi and Helper 1998); • the ultimate goal of collaborative relationships is to develop strategic advantage by pooling resources, gaining access to market and/or technical information, leveraging of complementary strengths and achieving of economies of scale (Vlosky and Wilson 1997); • firms collaborate not only to safeguard assets and enhance adaptation, but also to lower the costs of conducting development tasks by joining together to exploit scale economies better (Bello et al. 1999); • collaborative relationships with suppliers can be a means for buyers to scan the technological knowledge base of related industries and to keep its progress under control (Calabrese 2000); • increased market share; inventory reductions; improved delivery service; improved quality; shorter product development cycles (Corbett et al. 2001). According to Biong, Wathne and Parvatiyar (1997), resistance of firms to engage in partnering relationships is driven by: • fear of dependency – firms will be reluctant to engage in partnering relationships when they fear unilateral dependency on the other party due to: (a) loss of flexibility in strategic choices (e.g., in choice of suppliers); (b) fear of opportunistic behaviour of the partner, and (c) loss of personal or organizational control; • lack of perceived value in the relationship – firms will be reluctant to engage in partnering relationships unless significant value added is proposed in terms of: (a) cost reductions; (b) new sources of revenue such as development of new products and access to new markets; (c) superior market position; (d) development of new competencies (i.e., new technological solutions can provide advantages for both the customer and the supplier); and (e) social rewards (e.g., the effect on company’s reputation); • lack of credibility of partners – firms will be reluctant to partner with other firms that: (a) are small relative to the firm’s total demand in terms of size and capacity; (b) are unreliable in fulfilling agreements (e.g., related to delivery, quality); (c) lack an innovative outlook; and (d) have a generally low reputation; • rapid technological changes – in industries with rapid technological changes, large growth and many actors, firms will resist engaging in partnering relationships;

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Factors Influencing Partnering Process Implementations Literature has identified a large number of factors that shape inter-organizational relationships and has offered numerous categorizations for investigating each set of factors. For example, the literature suggests that to fully understand buyer–supplier relationships one must consider the characteristics and behaviour of the supplier, the characteristics and behaviour of the buying organization, the interaction process between buyer and supplier (Wren and Simpson 1996), the network where the dyad is embedded (Håkansson and Johanson 1992), the political and socio-economic environment under which both parties are operating (Håkansson 1982) and the characteristics of the industry both buyer and supplier are associated with (Campbell 1985). Such categorizations are apparent in models of buyer–supplier relationships and in many studies, either conceptual and/or empirical. Some of these models have brought together many significant influencing factors related to inter-firm collaboration and partnering. Such models follow Fynes’s (1998) classification in order to facilitate their identification. They have appeared in several disciplines such as channel management, operations management, supply chain management, relationship marketing, and industrial marketing and purchasing. It happens that not all focus on the same aspects of relationship management and when addressing the same issues, they examine them from a different perspective and even use a different terminology. Classifying models into discrete streams is an inexact task due to the level of duplication across literature. A review of the literature revealed four groups of models exploring the influencing factors of buyer–supplier relationships: one exploring the behaviour of only one party (Sheth 1973), another exploring the buyer–supplier dyad (e.g., the IMP interaction model), a third group emphasizing the network in which the firm is embedded (Håkansson and Johanson 1992) and a fourth group attempting to bring together the dyadic and the network elements (Håkansson and Snehota 1995). Unfortunately this research has not been evolutionary, which means that the resulting models of buyer–supplier relationships have not built on previous models (Wren and Simpson 1996). This has led to a body of research which is rather disjointed, as well as confused and confusing (Cheung and Turnbull 1998). The use of different terms to express the same category of factor is illustrative of this. In some cases, the categorizations and labels given to constructs not only confuse meaning, but also make it difficult to compare and summarize. Another example is found on the lack of clarity of the type of influence a factor may exert on buyer–supplier relationships. It often remains to be explained if a factor is influencing the overall buyer–supplier relationship or a particular feature of a relationship. At other times, impacts on collaborative or partnering relationships are mentioned without specification of the feature in question. Models and studies refer to factors influencing buyer–supplier relationships, yet often ignore factors that will affect each relationship uniquely and to a varying extent (Veludo et al. 2001). It seems that in these cases the complexity of relationships is not fully taken into account.

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Success Factors of Partnering Implementation For Sako, Lamming and Helper (1994) it takes time to develop partnerships. There are authors, such as Leverick and Cooper (1998), who suggest that building partnerships should be a stepby-step approach or, in other words, should be built gradually, as familiarity and trust between companies increase. Cousins (1994) shares a similar opinion, but justifies his view by arguing that organizations will find the change easier to implement if they go about it one step at a time. For Cousins important changes need to occur (e.g., an organizational cultural change) in both parties because if changes are not properly prepared, the move towards the adoption of partnering relationships can be compromised. New and Burnes (1998) have referred to the need for considerable changes in the behaviour of both buyer and supplier to develop a viable long-term and close business relationship. The notion of change is at the centre of the change model developed by Macbeth, Boddy, Wagner and Charles (1998), which recognizes the need to allow for the dynamics of change and consider the combination of people and institutional mechanisms as part of an implementation route for change. This model takes into account the dynamic and developmental process aspects of partnering, that do not often appear to be emphasized in the literature. Bensaou (1999) suggested that a partnering relationship should be carefully planned and chosen as a type of relationship which is costly to develop and maintain, as well as risky, given the specialized investments it requires. This aside, the choice affects how a firm defines its boundaries and core activities. Leverick and Cooper (1998) pointed out that partnering has risks that can be lessened by good partnership management, that takes into account the factors that influence the process of collaboration.

A Case Study of Partnering in the Automotive Sector A detailed investigation was undertaken to investigate business to business partnering activities between Opel and its European suppliers. The research was based on surveys and in-depth interviews. The complexity and variety of relationships between an assembler and its first tier supplier are typically characterized by the existence of collaborative and non-collaborative elements. The predominant collaboration form usually is formal and enforceable through contracts. Such relationships are not necessarily the full responsibility of the parent assembler’s subsidiary (transplant or more recently set up capacity expansion facility). Defining constructs were useful in determining the extent to which, if at all, the parties were moving in the direction of a more integrated and mutually considerate process. The research project undertaken with Opel in Portugal singularly failed to observe partnering concerning the items supplied to OP (Opel Portugal). Partnering agreements instead were established between Opel Germany, where a centralized purchasing department and R&D facilities are located, and the suppliers’ division or specific people charged with the negotiation of these types of contracts. This research revealed that, for the buyer, drivers for partnering agreements were the access to innovative technologies and capital, while for the suppliers were the increasing stability in supply and the gaining of access to the market. This study showed that project-based partnering relationships are much more common than partnering relationships with a longterm horizon.

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When considering the complexity demonstrated in OP’s focal network and its links back to the US, it is clear that the network effects are significant. Of importance is that the nature of the MNC decision processes and structures have enabling (or in this case more often constricting) influences on the freedom of action of their Portugal-based branch. Thus it comes as little surprise that the journey along the path to a more explicitly partnering relationship has a limited and insignificant status. The local management, even if they wished to get closer and become more integrated with local suppliers were not empowered through their parent company network to commit to such processes. The role of OP was also constrained through the level and location of decision-making authority across the European network. These are structural and procedural issues within the customer organization about which local suppliers (i.e., Portuguese-based direct suppliers – PBDS) can do little at their level. One however has to recognize that some of the PBDSs are of themselves part of more extended networks including MNCs. As such they have alternative influencing routes. Local suppliers, without the backing of their own MNCs, in order to influence decisions at a distance have opted for strategic alliances and/or agents close the customer’s purchasing decision centre (in this case Germany). Opel, by following in GM’s footsteps, was taking an arm’s length approach to its relationship strategy. Evidence has shown that Opel has been a company trying to find ingenious ways of exploiting upstream companies (i.e., first tier, second tier suppliers) and, furthermore, not looking at the opportunities offered by collaborative practices and behaviour. The logic of interfirm collaboration is value enhancement and through collaboration there are opportunities to reduce operational costs. The researcher suggests that the leadership of Opel should be attuned to develop an overall strategic view of where the industry is going and to consider the benefits of a truly collaborative approach to business relationships.

Implications for Practice and Policy The findings have shown some critical areas, which deserve some attention from OP and Opel (in particular, at head office and where maximum authority in the decision-making process lies), from its PBDS (some of which are Portuguese-owned companies while others are subsidiaries of MNCs) and from governmental institutions. The fast-changing competitive environment, with its shortened product life cycles and fast technological innovation, faced by automotive companies has created a demand for high levels of flexibility and the ability to cope with greater environmental change and uncertainty. A current issue for management is how to develop a more flexible company. Similarly to Hyun (1994), this researcher asserts that one way for final assemblers to achieve this would be through the synchronization of their activities with their suppliers’ activities. Delivery and the subsequent need for flexibility are critical issues in the relationships between OP and its PBDS. The practices required by OP were likely to demand substantial efforts on behalf of the supplier to achieve just-in-time (JIT) delivery but were being performed without significant support and commitment from the buyer. Delivery was practised in a context where OP, and ultimately Opel, were seeking some advantages (e.g., cost reduction) and influence over suppliers. In addition, it seems that the buyer was attempting to optimize its performance at the expense of its suppliers, who were trying to accommodate the need to be flexible. Although OP’s level of satisfaction with suppliers’ delivery was high, it was based on a low level of synchronization as demonstrated by the low level of coordination between parties and, in particular, by the absence of joint planning (in terms of production planning and management of capacity).

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OP’s inefficient disclosure of information related to production volumes, production schedules and volume of stocks required, did not allow the supplier to plan far enough in advance (e.g., production), which created difficulties for the suppliers and affected the climate of the relationship. The researcher, based on the evidence, infers that the managerial practices that Opel established for OP had effects in terms of performance, costs and ultimately competitiveness, with negative impacts for all parties involved. The researcher sees the alignment of processes and information flows, for which joint planning, increased information sharing and improved communication channels would be fundamental prerequisites, as beneficial for the buyers and suppliers. The potential sensitivity of sharing information between the buyer and its suppliers was known: however, it is prudent that there should be a balance between limiting the extent of commercially or competitively sensitive information exchange to that which is absolutely necessary while still achieving an open relationship. A successful synchronization of OP’s activities with its PBDS’s activities also depends on the synchronization between firms within the business network of OP. This notion seems to be compatible with the view held by Lagendijk (1997). who claimed that an automotive subsidiary should be based on the positivesum type of partnership and be attuned to a full exploitation of economies of specialization and integration throughout the production chain. It also appears that the PBDSs are constrained in what they can do to synchronize their supply chains given the limited amount of information coming from OP. Evidence has shown that the internal relationships within Opel affected the performance of both the MNC and buyer–supplier relationships. The main problems of intra-organizational relationships within Opel, felt by both OP and its PBDS, were communication, power relationships and the cultural differences between individuals. Opel should perhaps investigate its intra-organizational relationships, whose problems may be a result of the implementation of policies (e.g., human resources management) and of the perceived, unclear definition of its subsidiaries’ roles (e.g., responsibilities between Opel in Spain and Opel in Germany). PBDS had a significant understanding of Opel’s requirements and systems. This could help Opel in many of its improvements. Opel could benefit from being much closer to its suppliers and by establishing a more collaborative approach to them (e.g., cost reductions, knowledge transfer). Historically, GM has taken an arm’s length approach towards supplier relations (Kim and Mitchell 1999). Opel, by following in GM’s footsteps, was also taking an arm’s length approach to its relationship strategy. Evidence has shown that Opel has been a company trying to find ingenious ways of exploiting upstream companies (i.e., first tier, second tier suppliers) and, furthermore, not looking at the opportunities offered by collaborative practices and behaviour. The logic of inter-firm collaboration is value enhancement and through collaboration there are opportunities to reduce operational costs. Perhaps the leadership of Opel should be motivated to develop an overall strategic view of where the industry is going and to consider the benefits of a truly collaborative approach to business relationships. There have been strong recommendations for the final assembler to collaborate with suppliers (Testore 1998). This need for inter-firm collaboration is driven by the challenges and numerous pressures faced by the industry, including pressure to reduce cost and increase responsiveness (this requires suppliers to achieve challenging targets for which they need help from their customer). GM and Opel have been operating under the shadow of their collective history. Such a historical legacy must be overcome if this vehicle manufacturer is to succeed in developing more interfirm collaborative relationships and genuine partnerships with its key suppliers. The researcher suggests that profound change within this MNC requires changes in the underlying culture. A

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renewed collaborative culture needs to be created. The cultural gulf which needs to be bridged is vast, because other multinational networks need to be involved. The process of creating a cooperative inter-organizational culture between two companies that interact at multiple levels (i.e., local, regional, head office) in different functional areas, and with individuals from different cultural backgrounds should not be underestimated. The researcher believes that in such a process of change the suppliers may be of great help to Opel; through the understanding they have about Opel and through their self-interest in remaining, or becoming, the Opel’s preferred supplier. Opel must also consider whether their current behaviour supports their being a supplier’s preferred customer. From findings in this study that is, at the time of writing, unlikely, and whilst suppliers may not choose to refuse business from Opel, their truly innovative efforts may be directed towards other customers. This was not tested in the study but is a possibility referred to in other situations (Macbeth 1998). The evidence implies that Opel is not getting the best effort from suppliers. Opel has been a difficult customer for many suppliers. Based on other survey findings in this study, Opel is perceived as forming relationships with their suppliers that are not based on trust and commitment, trust and satisfaction nor on continuity. Furthermore, Opel has been relying on procedures and policies for relationship building rather than on the development of close personal relationships. Blois (1997) argued that certain relationships, such as those established by Opel, have been shown to have certain advantages such as control over whom the company deals with, (ultimately) profit gains and the ability to use opportunism to obtain advantage over suppliers. The researcher believes that Opel’s behaviour can lead to unsustainable situations for suppliers and to suppliers’ opportunistic behaviour. Perhaps if suppliers had a better alternative they would not choose Opel as a key customer. For some PBDS the efforts the suppliers make to please OP are notable given the low volume of demand and turnover they get from OP in comparison to other final assemblers. In the view of the researcher the attractiveness of OP as a key customer is relative. On the one hand PBDS, through OP, can get access to other subsidiaries of Opel such as OS and Opel Germany (OG), but on the other hand the business relationships they can build and the activities they can implement with OP are limited due to the subsidiary’s boundaries. In other words, the multinational network of OP offers to PBDS opportunities and constraints. An awareness of both opportunities and constraints has strategic implications for suppliers and impact on the development of their expectations. Evidence indicates that the strategystructure strategies, defined at the coordination centre of OP and applied in cascade through OG and OS, have influenced and affected the choices of inter-firm collaborative activities and relationship interactions at the dyadic level in Portugal. Hence, the entrepreneurial initiatives of OP have been limited. This should not be surprising, having taken Birkinshaw’s (2000) view into account, which was that ‘despite the compelling logic for tapping into local markets through the subsidiary network many corporations appear to neglect the creative potential of their subsidiaries’. Potential entrepreneurial initiatives undertaken by OP have been underestimated. This belief is based on findings, which have shown, for example, that OP’s initiatives for quality improvements, which were instigated by levels high in the Opel organizational hierarchy, brought positive results in the performance of both OP and PBDS. The measures that Opel applied elsewhere did not have such positive impacts on quality management. This is a sign that at the dyadic level in Portugal, performance improvement may be more dependent on Opel’s internal interactions than on the locally permitted activity. When looking closely at the organizational design of the internal network of OP and specifically the linkages between OP, Opel Spain (OS) and OG (Opel Germany), the researcher has found that Opel’s practices

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when in managing subsidiaries in a supply chain have been wasteful of resources and have been holding performance back. It remains a question as to what extent Opel has been aware of the impact that its strategic and dynamic allocation of resources to different units has been having and to what extent performance has been properly evaluated. This researcher argues that if the collaboration effort has not been well targeted then performance levels will be impacted, at all levels of Opel’s multinational network.

A Model of the Supply Chain Relationship Findings and conclusions from research with OP lead to the development of the framework shown in Figure 4.1. This includes a number of factors that can be used to analyse varying relationship types when the actors involved are subsidiaries of a MNC and/or actors in a network. Although these factors are context specific (the reason why the framework has been conceived as a contextual factors framework), the researcher claims that these factors can be used as explainers of the dynamics and processes associated with buyer–supplier interaction. Many of the factors that emerged from the case study are mentioned in the literature, albeit in a scattered and fragmented form.

Dyad RELATIONSHIP Actor Bonds

DIRECT SUPPLIER

Actors

Resources

An inherent trust A willingness to help Personal allocation Expectation of continuity Flexibility in agreements Resource Ties Information disclosure Sharing risks Sharing benefits Flexibility in delivery

BUYER

Actors

Resources

Activity/Business Process Links Activities

Continuous improvement Joint strategy setting Joint planning Joint R&D Conflict resolutions Two-way communication

Activities

Network

Figure 4.1

A conceptual framework to analyse inter-firm collaboration in industrial markets

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The main components of this conceptual framework are: (a) the focal company; (b) the relationship; (c) actor bonds; (d) resource ties; and (e) activity links. These components will now be defined and discussed, taking into account existing literature so that uniformity in terms and notions can be maintained. The Focal Company The focal company is an organization that performs activities and employs resources. It is formed by actors, resources and activities which are inter-related. This interdependence is indicated through the vertical arrows in Figure 4.1. Actors are defined as entities involved in activities to convert resources to finished goods and services for consumption by end users. In other words, actors are defined by the activities they perform and the resources they control. Therefore, actors are both resource holders and resource users. Actors possess different resources, depending upon the nature of the global environment they are working in and the position they hold in the network (Harland 1996). There are many different types of resources. They can be tangible or intangible (O’Donnell 1999). Actors carry out activities in the pursuit of their own goals. Actors possess their own perceptions of the interacting party (Håkansson and Snehota 1989). The two main types of activities are transformation activities and transfer activities (Johnston et al. 1999). Through transformation activities resources are changed in some way. Transfer activities link the transformation activities of different actors to each other. The Relationship Similarly to the AAR model, in this framework three interdependent substance layers identify a relationship. These result from the interaction process between two dyadic actors: actor bonds, resource ties and activity links. Actor bonds describe the connections between the actors, either individual or organizational, through their perceptions of each other. Resource ties describe the organizational connections that are developed through resource inputs and outputs. Activity links describe the connections formed by activities and business processes, which the actors develop with each other. There is a large variety in the substance, which depends on the existence, type and strength of actor bonds, resource ties and activity links. The differences may reflect the type of industrial activity or company specific circumstances. The functions of a relationship can be formulated in terms of the effects produced by the relationship on the dyad, on each of the involved parties and on third parties. Relationships make it possible for an organization to access, and exploit, the resources of other parties, and to connect the parties’ activities together. The substance layers are inter-related with each other, implying that an occurrence in one substance layer will affect other substance layers, as indicated by the vertical arrows in Figure 4.1. The connectedness of the focal relationship with other actors is indicated by outward facing horizontal arrows from each substance layer. Actor Bonds Actor bonds occur when two actors interact with each other through an exchange process (Håkansson and Snehota 1995). The following partnering characteristics are used as a measure of actor bonds: an inherent trust, willingness to help one another, personnel allocation, expectation of continuity and flexibility in agreements.

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Resource Ties The researcher considers resources as including all assets, capabilities, organizational processes, and information knowledge controlled by the firm and which enable it to conceive and implement strategies that improve its efficiency and effectiveness. Resources are also seen as commodities that actors use during activity links to produce their goods and/or services. Ties are created through the production process as resource inputs and resource outputs go from one company to another. Through inter-firm linkages, firms can obtain access to assets that create value, that are not available for purchase in the market, and that require time to build up. Thus, a firm can use inter-firm linkages to access assets stocked by other firms, and share its assets. The following partnering characteristics are used as a measure of resource ties: information disclosure, the sharing of risks and benefits, and flexibility in delivery. Activity Links Activity is assumed to be a sequence of acts directed towards a purpose (Håkansson and Snehota 1995). Activity becomes the generator of a continuously emerging context. The activity link construct includes the actions done together by the actors, through the exchange process (Håkansson and Johanson 1992). According to Håkansson and Snehota (1995), activity links in a dyadic relationship are affected by adjustments in the activity structures of the companies involved. In addition, activity links affect the activity structures of the buyer and the supplier, as well as the activity pattern in the business network. The following partnering characteristics are used as a measure of activity links: continuous improvement, joint strategy setting, joint planning, joint R&D, conflict resolution and two-way communication.

Contextual Factors Framework As findings have shown, relationships can vary. The researcher has found that various factors influence inter-firm collaborative relationships between OP and its PBDS and that these factors did not have the same importance for all companies. Based on this, the researcher infers that various combinations of factors can explain the variety of inter-firm collaborative relationships, which companies may implement. Findings and conclusions led the researcher to develop a framework, which includes a number of factors that can be used to analyse varying relationship types when the actors involved are subsidiaries of a MNC and/or actors in a network. Although these factors are context specific (the reason why the framework has been conceived as a contextual factors framework), this researcher claims that these factors can be used as explainers of the dynamics and processes associated with buyer–supplier interaction. This claim is based on the fact that most of the factors that came out from the case study are mentioned in the literature, albeit in a scattered and fragmented view. One implication from the framework is that it combines both inter- and intra-organizational relationships. The researcher claims that both perspectives are needed to develop a thorough understanding of relationship strategies undertaken by actors. The IMP researchers have concentrated on the inter-organizational aspects and MNC researchers have looked mainly at the intra-organizational aspects. This framework combines the two streams of research to develop a holistic picture of relationship development by MNC subsidiaries. The literature relating to contextuality (Mittila 2000) was of great influence in the development of the framework.

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This researcher does not suggest that this framework has the power to explain all buyer– supplier relationships within a multinational network context. However, the merit of this framework should be seen in the light of its ability to speak specifically for the population from which it was derived and in the light of the understanding one can get from it. Bringing together both inter- and intra-organizational relationships, the framework develops a wider network perspective than considered at the start of the research project. The wider network perspective is particularly applicable to the automotive industry, where MNCs dominate the assembly processes through multiple plants and utilizing large numbers of suppliers through a number of different tiers. As in the case illustrated in this study, the parent headquarters may be some distance (geographically and structurally) from the subsidiary and therefore an intra-organizational approach is necessary. By bringing the inter- and intra-organizational aspects of relationships, it can be seen that actors operate within four contexts: (a) organizational; (b) relational; (c) spatial; and (d) network. These groups and their linkages are illustrated in Figure 4.2.

Outer Network Context

SUPPLIER Organizational Context

Regional unit

Local unit

Relational Context Relationship

Relationship

Relationship

Outer Spatial Context

Figure 4.2

Contextual factors framework

The key modules are comprised of the following: Organizational context: –– Corporate Culture –– Employment System Links –– Strategy –– Policies –– Organizational Structure

BUYER Organizational Context Co-ordination unit Opel in Germany

Regional unit Opel in Spain

Inner Spatial Context

Inner Spatial Context

Co-ordination unit

Inner Network Context

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–– Actors –– Resources –– Activities. Relational context: –– product –– service –– information –– finance –– communication –– personal relations –– atmosphere (trust, climate of pressure, buyer’s conflict behaviour) –– relationship specific investments. Inner spatial context: –– position in the network –– geographical location (e.g., local, regional, head office). Inner network context: –– network of actors –– network of resources –– network of activities. Forces that bind the network: –– embeddedness –– connectedness –– interdependence. The organizational context refers to the specific features of a company that affect the focal relationship. Therefore, this context is limited by the activities and resources internal to the organization. Håkansson and Ford (2002) indicate that the internal processes of the actor are influenced by the relationships it has and it also influences its relationships. Factors that operate within this context include: corporate culture, employment system links, strategy, subsidiary policies and strategy, actors, resources and activities. The relational context is the frame in which inter-organizational relationships develop. These relationships operate between a subsidiary and external dyad partners such as customers and suppliers. These relationships types are characterized by collaborative and non-collaborative elements. The factors that operate within this context include: components which effect the dyadic interaction process (product, service, information, finance), communication related issues, the personal relations established between buyer and suppliers, the atmosphere affecting and being affected by buyer–supplier interaction, and the relationship specific investments made by both parties. Atmosphere is considered to be an intervening group of variables, which reflect the behaviour of the parties involved and the mutual expectation each of the parties holds, in relation to the other. Relationship specific investments include, the activities performed within the relationship (e.g., adjustments in transportation and payment routines), the activities performed by the respective companies (e.g., reallocation in the production processes and product customization), and those tangible (e.g., building and tools), and intangible (e.g., time allocated to the buyer) specific investments, either strategically planned and implemented, or occurring in an unconscious manner. The factors also include those depicted in Figure 4.1 as

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the actor bonds, activity links and resource ties. All interaction occurs externally at the dyadic level with the subsidiary having the ability to influence the relationship, but perhaps limited in its ability to control the relationship to its liking. The inner spatial context is the space, both in terms of geographical location and network position, in which a firm resides. For instance, in the case study investigated in this research, the inner spatial context consists of three layers (Portugal, Spain and Germany) where the buyer and its PBDS (through direct or indirect subsidiaries of their own MNC networks) undertake business relationships. The inner network context includes the network of actors, resources and activities of a subsidiary’s (i.e., focal) business network and the intra-organizational relationships of the companies involved. The network, as configurations of actors carrying out activities, forms the contextual domain in which all the companies (i.e., buyer and suppliers) operate. Embeddedness, connectedness and interdependence, are the forces that bind the network components. Network’s influence embraces the factors, which reflect the actors’ inducements, constraints, and availability of opportunities to form relationships and alliances, either vertical or horizontal. The inner spatial context and the inner network context correspond to the internal parts of a subsidiary’s (i.e., focal) business network, rather than the MNC (e.g., GM’s multinational network) in general. The external context would be formed by all organization sets of the different units of the MNC. However, the focal subsidiary’s capabilities, and therefore its position within the MNC, are primarily shaped by its role in the whole network (Andersson and Forsgren 2000). The outer spatial and outer networks contexts include all the remaining factors that may influence the subsidiary’s (i.e., focal) business network. The external network context is the context that develops externally to the subsidiary with all external organizations, that is, its external business network. This context includes suppliers (all tiers), government departments, union organizations and customers that form part of the wider business network. The links in the network context (i.e., internal and external) are of a relational nature with the subsidiary influencing and being influenced by the network effects that flow through the network. The factors that operate within the network context are activity patterns, web of actors and resource constellations (Håkansson and Snehota 1995). Each context will require a different approach to strategy development due to the differing relationships developed in each situation. For example, the hierarchical relationships developed within the spatial context may require strategies aimed at changing policy development and influencing resource allocation. Measures used to achieve these aims could be through developing closer ties with regional units, indicating the subsidiaries’ ability to undertake higher level tasks and developing personal relations with employees within the closely linked units. The four contexts are not independent and consideration needs to be given to how changing aspects of one context will affect the other three contexts. Managers may find they can identify factors vary in relation to the others in differing contexts. By analysing those factors affecting each context, actors will be able to develop a greater understanding of how they can influence relationships within each context. Moreover, the ability to influence the relationships will vary between contexts. For example, the ability for an actor to exert some influence at the network level will be much less then its ability to influence the organizational context.

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Conclusions Despite the extensive work on inter-firm collaboration (IFC) and partnering, a review of literature revealed that most studies have focused on IFC and partnering without taking into account the ownership ties of firms, which is the case of the MNC and respective subsidiaries. Largely missing from the literature is a clear understanding of how IFC and partnering are implemented at different points within a MNC network. This research, by exploring these subjects within the context of a an automotive subsidiary in Portugal of which no study has been developed yet, has brought some context specific insights which allow a better understanding of real-life practices on the referred subjects. Literature review revealed that partnering has been, for years, a competitive strategy pursued by the vehicle manufacturers (VMs) and their motor vehicle parts and components suppliers. Long practiced in Japan, VM–supplier partnering relationships have increased in the US and Europe. In a market characterized by changing regulations, intense cost pressures, and discriminating consumer preferences, VMs have developed partnering relationships with their supply base as a means to attain resources and achieve goals that elude these companies when operating alone. The increasing importance given to partnering within the automotive industry has been accompanied by a great number of studies on this topic, as this chapter tried to illustrate. However, lack of clarity, misunderstanding, controversy, partial views of phenomena, lack of an integrated and multidisciplinary approach to research are evident. Overall, the picture painted is one of a sense of confusion with the concept and a lack of empirical studies taking into account both perspectives of VMs and respective suppliers as well as the organizational structure of the parties involved in the business relationships they establish. Thus, only partially reliable insights can be drawn from the existing literature. This may be explained by: (a) the assumptions researchers based their research on and the different objectives that they were set to achieve; (b) the limitations on the research design; (c) a static perspective, which took ‘snapshots’ of the organization at particular points in time and described the organization at that point in time only; and (d) a focus on dyadic relationships without taking into account the network context and the ownership ties of the companies involved. The purpose of the literature review was to develop an understanding of the relevant work on inter-firm collaboration and partnering and to identify areas where further research is required. Literature review was explored to unearth the research objectives. These ‘grew out’ of the discussion as gaps in the body of knowledge were discovered. In so doing, the aim is to help the reader to grasp the novelty of the work conducted by the researcher. It is therefore important to select particular areas on which to focus the research. An area not yet explored and discussed is the one that refers to inter-firm vertical collaboration and partnering, taking into account the ownership ties of firms, such as those of MNCs. It is based on this gap that the researcher has defined the following objectives previously referred to: (a) to explore how inter-firm and partnering operates between a subsidiary of a motor vehicle manufacturer and its direct suppliers in Portugal and (b) to explore the influencing factors on inter-firm collaboration and partnering between a subsidiary of a motor vehicle manufacturer and its direct suppliers in Portugal.

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Core Findings Four major findings from this research are: 1. relationships can be characterized by several dimensions, each of which is a mix of collaborative and non-collaborative elements; 2. a diversified scenario of relationships can be explained by the different combinations of several factors; the importance of each needs to be weighted and hierarchicalized; 3. the wider network affects both to enable and constrain the freedom of action at the level of the customer–supplier dyad: 4. partnering is contingent on the position, role and influence at different points in the network.

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Chapter 5

International Negotiation Brooks C. Holtom

Mixed Signals? Perry worked for a large multinational company that was divesting a portion of its portfolio. As part of its restructuring, the company offered Perry and many of his fellow employees in the same division a generous severance package including outplacement assistance. Perry was making €50,000 per year at the time. After finding a new job that fit his talents well, Perry asked his executive coach at the outplacement firm for negotiation advice regarding the job offer. The executive coach counselled him to be quiet at the bargaining table. Perry remained silent when the new firm offered him €53,000 per year. The recruiter interpreted the silence as disappointment and immediately increased the offer to €55,000. How many ways could Perry’s silence be interpreted by the new firm? Delight? Dissatisfaction? Disbelief ? In a short moment, the recruiter making the offer had to analyse her options (e.g., Do we have other acceptable candidates who might work for €53,000 or less?), consult her salary range for this position (evidently it goes up to at least €55,000) and interpret Perry’s nonverbal communication. While we don’t know exactly what she was thinking, what we do know is that in this case Perry’s reward for his silence was €2,000 – per year – as long as he is with the firm. Because future raises will build on this base, the value of this concession is more than €132,000 (based on an assumption of 5 per cent annual pay increases and a 30-year career).

Introduction People are negotiating all the time. In many circumstances they are unaware of their active or passive role in a negotiation process. Companies negotiate contracts to buy and sell products. Governments negotiate agreements on free trade, environmental performance, technology transfer and entice organizations to set up facilities within their borders. Spouses negotiate over household chores and where to go on vacation. Parents negotiate bed times or allowances with children. Friends negotiate to determine where to go out in the evening. They do it over email, instant messaging, text messaging or even occasionally through letters. Other times they have phone conversations, speak face to face or simply gesture. Because people are constantly negotiating, it is important for business and personal success to understand the fundamental processes of negotiation, particularly within an international context. That is the purpose of this chapter. After examining the core principles involved in preparing to negotiate almost anything (ranging from deciding who will clean the apartment to delicate diplomatic relations), the focus will then shift to how the principles are adapted to fit different national or cultural contexts.

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Prepare, Prepare, Prepare Failing to prepare is preparing to fail. John Wooden (USA Basketball Hall of Fame Coach)

Recognize Negotiation Opportunities The first step in preparing is to recognize negotiation situations. Many people fail to negotiate effectively because they have not foreseen the scenario where discussion is required to resolve differences. As a result, they haven’t spent time to identify opportunities and go into the bargaining session less prepared than their ‘opposite number’. Some proactive people see negotiation as an expedient way of resolving conflict when there are two or more parties that perceive and react in a conflictual manner because their interests are negatively affects. Others, in contrast, propose negotiated terms that could benefit both sides if they work together. They assume that they can persuade the other side to offer a better deal than they would have without such persuasion. They also assume that there will be some give and take – both sides will modify their demands or give in on some of their opening requests. By definition, negotiating parties need each other. That is to say, they are interdependent. For example, a buyer cannot obtain a good unless someone is willing to sell it. An employee cannot negotiate over a position unless an employer needs the work done in-house. The level of mutual dependency may vary. In other words, one party may have more power than the other in any given interaction. This is a topic that will be further addressed in detail. In short, the two parties have interlocking goals and they depend symbiotically on the other to fulfil these goals. Assess Interests of Both Parties The second step in effective negotiation preparation is to carefully assess one’s own interests and priorities as well as those of the other party. Fisher, Ury and Patton (1991), in their famous book Getting to Yes, take great care to differentiate interests from positions. The interests are the needs, desires and fears that drive negotiations. Positions, by comparison, are the assertions, demands or offers that parties make during a negotiation. To be successful in a negotiation, it is not enough to argue for a position. A negotiated outcome should satisfy the interests of both parties. Some people mistakenly believe that preparation involves thinking only about what they want. Not so. A possible agreement that would meet only their needs will not be sustainable and will likely result in further and more bitter conflicts if it doesn’t also meet the needs of the other side well enough so that they are willing to accept it. Further, interests include substantive issues (e.g., price or delivery terms), relationship issues (e.g., trust) and principles (e.g., honesty or fairness). For each negotiation proposal – either demand or offer, that a person makes, he or she should ask ‘why?’ or ‘for what purpose?’ Why do I want payment by the end of the month? What is the purpose behind asking for payment in cash? These questions reveal the interests, needs and drivers that underlie these demands. If there is doubt or uncertainty relating to whether something is a position or interest, individuals should determine whether there are alternative ways to satisfy the proposal or demand. If not, it is a position (for example ‘I demand a private office’). If there are several ways to satisfy a demand (e.g., ‘I need a quiet place to do my work’ or ‘I would like more status in the organization’), it is probably an interest.

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Once interests are identified, they should be prioritized. This will aid the process of comparing proposed options more efficiently and also may help achieve an optimal result. If a deadline is looming, prioritizing interests will highlight the issues on which one should spend the remaining time. Finally, prioritizing helps in making concessions. Ideally individuals will identify high priority interests for the other side that can be met with little difficulty on their own side. When this occurs on both sides of the equation, the resulting exchange creates value – the key to most successful negotiations. Determine Your Best Alternative to a Negotiated Agreement (BATNA) Not every negotiation concludes with an agreement. Not every negation should. Occasionally, a party can do no better than by abandoning the process when the costs of the proposed agreement exceed its benefits or because someone else is in a position to offer a better deal. In most negotiation situations, there may be multiple alternatives for satisfying your interests. For example, when someone is interested in buying an automobile shortly after graduation from the university and they approach Dealer A (the Audi dealer in your hometown) to discuss Car 1 (a new four-door sedan), there are many alternatives to making this purchase. One alternative is to buy the same model from Dealer B (the Audi dealer in a neighbouring town). Another alternative is to consider buying Car 2 (a slightly used four-door sedan) from Dealer A or from Dealer B. In short, in this example there are many possible alternatives. To increase the number of available options in any given negotiation interaction, it is critical to understand better alternatives to a negotiated agreement (BATNA) with the other party before. If one believes that Dealer B will sell Car 1 to you for €21,000, then one should not pay any more than that amount to Dealer A for the car. In other words, if Dealer A will not come down below €21,000 for the car, the BATNA (Car 1 from Dealer B) will give the individual the power to walk away from the proposed deal. Alternatives are one of the greatest sources of power or leverage that a negotiator can develop. Of course, it takes time to study the market, to talk to various dealers, and to compare all of the alternatives. However, this is time well spent if the negotiation is important. Think for a moment about how it would feel to walking into a job interview with no other job offers. Think about how the salary discussion would go. Now contrast that with how it would feel walking into the discussion with two other job offers. How would the salary discussion go? The difference is power. The well-prepared negotiator seeks to understand and strengthen their own BATNA, and analyses the BATNA for the other party at the negotiating table. While it may not be possible to know their BATNA with perfect confidence, through research and reasonable forecasts it may be possible to estimate their BATNA or at very least make an educated guess at what it might be. Explicit and Tacit Negotiation Assumptions A contemporary expression follows that: When you assume something, you make an ‘ass’ out of ‘u’ and ‘me’.

When it is necessary to make a number of assumptions in the course of preparing to negotiate, individuals may find themselves somewhat outside their comfort zone once they commence negotiations. Thus, it is important to keep track of assumptions and periodically test them

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in the course of the negotiation. By sharing information with the other party, it is possible to create an environment where it’s possible to request information to test the assumptions. As these assumptions are affirmed or refuted, estimates can be updated or refined. The opponent’s BATNA may be better for them than any fair solution one can offer. Further, if both sides have attractive BATNAs, the best outcome of the negotiation for both parties may well be not to reach agreement. If the parting is amicable, both groups will likely preserve the possibility of negotiating again in the future. In summary, understanding the BATNAs on both sides is critical to successful negotiation preparation. Choose an Appropriate Negotiation Strategy The fourth step in effective negotiating is to strategically assess the best approach to resolve the issues. One of the most popular approaches for determining negotiation strategy is known as the dual concerns model (Pruitt and Rubin 1986). The model asserts that parties in conflict have two types of independent concerns: a level of concern for their own outcomes and a level of concern for the other party’s outcomes. Figure 5.1 shows the level of concern can vary from low to high on either dimension. In effect, the stronger a person’s concern for his or her own outcome, the more likely the person will be to pursue strategies located on the right side of the diagram. The stronger a person’s concern for the other party, the more likely he or she will pursue strategies located at the top of the chart. While there are many potential points of intersection between the assertiveness dimension (the horizontal dimension) and the cooperativeness dimension (the vertical dimension), scholars have identified five major strategies for conflict management. Integrating (also called collaborating or problem solving) is the strategy in the upper right corner. Pursuing an integrative strategy means that the negotiator is both assertive and cooperative. When collaborating, an individual attempts to work with the other person to find a solution that fully satisfies the concerns of both. It involves investigating an issue comprehensively to clearly understand the underlying concerns of both parties and then searching for alternatives that meet both sets of concerns. In enacting an integrative strategy, the parties will often explore a disagreement to learn from each other’s insights, resolving some condition that would otherwise have them competing for resources, or confronting and trying to find a creative solution to an interpersonal problem. This approach frequently is referred to as a ‘win-win’ approach because of its focus on maximizing the joint outcomes for the parties. Accommodating (also called yielding or obliging) is the strategy in the upper left corner. When accommodating, an individual neglects his or her own concerns to satisfy the concerns of the other person. This mode relies on a profound level of self-sacrifice. Accommodating involves lowering one’s own aspirations to let the other win. Though many people might think it a strange strategy, it has definite advantages in conflict scenarios. For example, when an issue is relatively unimportant to one party and very important to the other party, the first may increase trust or goodwill with the second by accommodating the latter’s request. Alternatively, after accommodating another’s request, the first may claim value in a subsequent interaction because of a sense of obligation on the part of the second to reciprocate the favour. Avoidance (also called yielding or inaction) is the strategy in the lower left corner. It is unassertive and uncooperative. When avoiding, a person does not immediately pursue his or her own concerns or those of the other person. He or she does not address the conflict. Avoiding might take the form of diplomatically side-stepping an issue, postponing an issue until an appropriate time, or simply withdrawing from a threatening situation. In Japan, he or she may state ‘this is very difficult’. Translated into assertive language, this expression means

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‘there is no point continuing. We have made up our minds and there is no chance you will get what you want. We are done talking except for the niceties demanded by protocol.’ Distributive (also called competing or contending) is the strategy in the lower right corner. It is assertive and uncooperative. It is a power-oriented mode. When competing, an individual pursues his or her own concerns at the other person’s expense using whatever power seems appropriate to win his or her position – the ability to argue, rank, economic sanctions, and so on. Competing might mean standing up for your rights, defending a position one believes is correct, or simply trying to win. This approach is sometimes called the ‘win-lose’ approach Compromise is the strategy in the middle of the dual concerns model. It is intermediate in both assertiveness and cooperativeness. When compromising, the objective is to find an expedient, mutually acceptable solution that partially satisfies both parties. Compromising falls on a middle ground between competing and accommodating. Likewise, it addresses an issue more directly than avoiding though doesn’t explore it is as much depth as collaborating. Compromising might mean splitting the difference, exchanging concessions, or seeking a quick middle-ground position. These negotiation strategies should not be confused with personal negotiation styles. As can be observed in the box below, there are a wide variety of ways of describing a person’s style of negotiation. As a thought exercise, take a few minutes to consider how the various styles might be useful in implementing one of the negotiation strategies outlined by the dual concerns model. For example, an aggressive style might suit a distributive strategy well and

High

Concern for other (cooperativeness)

Accommodating

Integrative

Compromise

Avoidance

Distributive

Low

High Concern about own outcomes (Assertiveness)

Figure 5.1

Dual concerns model

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also seriously hinder an integrative strategy. As a second example, a vague communication style on the part of one negotiator would reduce the probability that two parties could clearly understand the underlying needs involved in the negotiation and thereby preclude win-win outcomes that come most frequently from an integrative strategy. Negotiation Styles 1. Behaviours vary between aggressive versus assertive versus submissive versus unconditionally constructive. 2. Precise versus vague → specified solutions versus ‘We now know what the questions are that need answers, and potential solutions will be identified and evaluated. What we know evolve and what we decide will need reconsideration in the light of new knowledge over time’. 3. Legalistic versus casual, ad hoc and exploring opportunities based on trust that the other will do the right thing and principled behaviour. 4. Tolerance of ambiguity versus need for precision, specifications and clarity. 5. Open and honest about what is relevant versus conniving, contriving, cunning or playing games – one against another. 6. Taking responsibility versus placing blame → ‘I’m sorry, I made a mistake’ versus ‘It’s your fault!’ 7. Demonstrating respect versus superficial expressions of cordial politeness. 8. Terms based (e.g., price, delivery) versus principles based (e.g., honesty, openness). 9. Long-term versus short-term focus → ‘We are building something together’ versus ‘I want it now!’ 10. Telling rather versus selling ideas → Tayloristic instructions ‘I think, you do!’ versus ‘What do you think? How would you do it. Do have a go and let me know what happened’. 11. Intellectual versus emotional arguments → logic versus sensitivity.

Each conflict management strategy has its advantages and disadvantages. Each is more or less appropriate given the type of conflict and situation in which the dispute occurs. For example, if a fast decision is needed, a distributive approach is likely to be superior to a collaborative approach. In contrast, if the issues are complex and one party alone cannot solve the problem, then a collaborative approach is preferred. In summary, careful and systematic consideration of the level of concern for the outcomes for oneself and for the other party should point to the most appropriate strategy for negotiation. Situation Assessment One of the key considerations in determining one’s level of concern for the other party’s outcomes is the expected length of the relationship. In the case where they anticipate interacting for many years into the future on many different issues, then the parties are well advised to have a high level of concern for the other party’s outcomes. The full range of the parties’ respective interests need careful assessment. Key attributes of this scenario include: 1. Is the negotiation one-shot, long-term, or repetitive? 2. Do the negotiations involve scarce resources, ideologies, dogma or objectives? 3. Is the negotiation one of necessity or opportunity?

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4. Is the negotiation an exchange of dialogue or a dispute situation? 5. Is this negotiation linked to other negotiations? 6. Is agreement required? 7. Are there time constraints or time-related costs? 8. Where do the negotiations take place? 9. Is third-party intervention (e.g., mediators, arbitrators, courts) possible? 10. Are there norms or conventions that apply to this negotiation? 11. Do negotiations involve more than one offer? Who should make the first offer? 12. Do negotiators communicate explicitly or tacitly? 13. Are precedents relevant and important? 14. Do we know everything to make a confident proposal? 15. What unanticipated consequences could occur from the agreement? 16. Is what we are going to propose provocative, a surprise, difficult to accept, urgent, in direct conflict with the principals, beliefs and concerns of the other party? While providing detailed discussion about each of these points is beyond the scope of this chapter, skilled negotiators will consider the ramifications of each as they prepare to negotiate. There are a number of excellent negotiation texts that will analyse these issues in depth and great clarity (Thompson 2004; Lewicki et al. 2005). Accreditation of Proposal Two important parts of actual negotiations are 1) the ability to present a case clearly that is supported by facts and solid arguments, and 2) the ability to refute the other party’s arguments with persuasive counter-arguments. While the wide breadth of issues that can be included in negotiations makes it almost impossible to delineate all of the procedures that can be used to assemble the necessary information, there are some helpful general questions to guide a negotiator’s preparation (Lewicki et al. 2004). 1. What facts support my point of view? What substantiates or validates this information as factual? 2. With whom may I clarify the facts? What records, files or data may exist to support these arguments? 3. Have these issues been negotiated before by others? Can I speak with them? What records exist of these interactions? 4. What are the other party’s views likely to be? How can I respond to them as well as develop creative positions that might bridge our collective interests? 5. How can I best present the facts in my case? Are there charts, graphs, pictures or expert testimony that will be helpful to me in making the case? Opening Offer Preparing a compelling case for your opening offer is vital to success because opening offers have been demonstrated to have such a strong impact on the final outcomes in negotiation, it is critical that negotiators carefully consider their opening offers. In contrast to the widely accepted model of reality, research evidence overwhelmingly asserts that negotiators that make an opening offer have the upper hand. The metaphor to describe this is that he or she ‘sets the anchor’ from which all other offers are considered an adjustment.

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Consider the following example. Deepa is in her second year of university studies. She would like to purchase a used textbook from a third year student, Daniela. Like most students, Deepa would like to buy the book for as little as possible. She sets her goal at €6. She is not sure she will be able to get it for that little, though she definitely will try. This goal is also known as a target. Deepa knows of a number of students who are selling this textbook for €15. That is the lowest a price of which she is aware. Because this is her best known alternative (BATNA), she sets €15 as her resistance point or walk-away point in the upcoming negotiation with Daniela. Independently, Daniela has also been gathering information from friends and the web to get a sense of the market for this book. Daniela has an offer for the book from another student for €11. However, she has heard of at least one sale that took place for €20. She sets €20 as her target and €11 as her resistance point. Figure 5.2 shows that the buyer’s bargaining range is €6 to €15 whereas the sellers bargaining range is from €11 to €20. The area of overlap (€11 to €15) is known as a positive bargaining zone or zone of potential agreement. Identifying this overlap is essential for negotiators. Typically, negotiators’ target points do not overlap. However, it is often the case that their reservation points do. The challenge of negotiation is to reach a settlement that is most favourable to oneself and does not give up too much of the bargaining zone. If the parties fail to reach agreement in this situation, the outcome is an impasse and is suboptimal because they leave money on the table and are worse off not reaching an agreement than reaching agreement. In the event the bargaining ranges do not overlap (Figure 5.3), there is a negative bargaining zone. Put differently, the negotiators never will be able to reach an agreement. The sooner they realize this, the sooner they should exercise their BATNA. Because negotiations are costly to prolong, it is in both parties interests to determine whether there is a positive bargaining zone. If not, they should stop negotiating and pursue other opportunities. The positive bargaining zone is the amount of overlap in the parties’ reservation points. It is a measure of the ‘pie’ (at least in a single-issue negotiation) as well as the value created by entering into the agreement. The fact that negotiated settlements fall somewhere in the bargaining zone and that each negotiator tries to maximize his share of the bargaining surplus illustrates the mixed motive nature of negotiation. Put differently: 1. negotiators are motivated to cooperate with the other party to get a settlement; 2. but they are also motivated to claim as much of the bargaining surplus as possible. One of the most frequently asked questions about negotiation is: How can I get most of the bargaining surplus for myself ? The simple answer is to determine the other party’s resistance point and offer him the option that represents this reservation point. However, this is easier said than done. Most negotiators never reveal their reservation point, but it may emerge unintentionally. Examples of a direct request for information about the other party’s reservation point are: ‘Tell me the bare minimum you would accept from me, and I’ll see if I can throw in something extra’ and ‘Why don’t you tell me the very maximum you would be willing to pay and I’ll see if I can shave off a bit?’ Even when someone reveals his reservation point, there is no way to verify he is telling the truth. Thus, trust is important. However, when someone tells you something that is not in their interest, you may have more reason to believe it. Returning to our example, if in initiating the discussion Deepa offers to pay €6 (her target), we would expect Daniela to return a counter-offer of €20 (her target). After going back and forth, if Deepa makes a final offer to Daniela of €13 for the text, it is likely that Daniela will accept it because it is better than her best alternative (€11). This price is also likely to satisfy Deepa as it is €2 less than her best alternative. In sum, in this example, the buyer’s surplus is

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Positive Bargaining Zone

$ 5

$ 10

BT

$ 15

Buyer's Bargaining Range Positive Bargaining Zone

SR

BT Buyer's Target Point BR Buyer's Resistance Point Figure 5.2

$ 20

BR

Seller's Bargaining Range

ST

ST Seller's Target Point SR Seller's Resistance Point

Used textbook negotiation (a)

Negative Bargaining Zone

$ 5

$ 10 Buyer's Bargaining Range BT

BT Buyer's Target Point BR Buyer's Resistance Point Figure 5.3

$ 15

$ 20

Seller's Bargaining Range SR

ST

BR Negative Bargaining Zone

ST Seller's Target Point SR Seller's Resistance Point

Used textbook negotiation (b)

€2 and seller’s surplus is €2. While life is rarely this fair, in this example the two parties are better-off trading with each other than any of their alternatives and the benefits are shared equally as can be seen in Figure 5.4.

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$ 10

$ 15

Buyer's Bargaining Range

BT

Positive Bargaining Zone

Buyer's Surplus

SR

BT BR

Buyer's Target Point Buyer's Resistance Point

Figure 5.4

$ 20

BR

Settlement Seller's Surplus Seller's Bargaining Range

ST SR

ST

Seller's Target Point Seller's Resistance Point

Used textbook negotiation (c)

Concessions What was not discussed explicitly in the example above was the pattern of concessions that Deepa and Daniela made in the course of their conversation. Most scholars believe that the timing and amount of concessions constitute an important part of the ‘negotiation dance’ (Raiffa 2000). However, there are significant differences across cultures regarding the interpretation of the messages conveyed by the concessions. For example, in some contexts, it is believed to be more effective to make progressively smaller concessions to signal that you are getting close to the walk-away or resistance point. In the case of Deepa, this might have been represented by the following pattern of offers: €6, €9, €11, €11.75, €12.40, €12.80 and €13. Other cultures, by contrast, often start with extreme opening offers to provide ample room for many large concessions as a signal of willingness to sacrifice for the other. The same pattern may apply even if the size of the concessions would generally be larger. An alternative concession pattern that has received some empirical support is the Black Hat, White Hat (BH, WH) strategy. The essence of this strategy is to make a number of small, but equal concessions and then make one final large concession in an attempt to signal, ‘Hey, let’s get to the bottom of this process, I am going to my ‘bottom line’ and I hope you’ll agree.’ If Daniela followed such a pattern in the example above, it might look something like this: €20, €19, €18, €17, €16, and €13. The key point to take away from this example is the need to identify the cultural norms that govern where you will negotiate as will be discussed in greater detail later in this chapter. A third strategy is straight away to express the lowest acceptable and sustainable bottom line and maintain a take it or leave it aptitude.

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Western manufacturing organizations typically bought based on lowest purchase price paid. Suppliers had then to justify price increases as a result of the customer’s modified specifications and expectations. By contrast, Japanese companies recognize supplier’s rights to make a reasonable profit provided the customer’s expectations are satisfied. The Japanese focus on costs rather than profit. They will accept a higher initial price provided both agree that they will examine non-value-added waste that is part of the cost structure. They agree to work together to identify and do something about these wastes. Both agree at the beginning of the process what they are prepared to contribute to the improvement process and what they expect to achieve. Both agree also how the benefits of reduced cost will be shared. Customers reduce their purchasing budgets and suppliers increase their profits for a given turnover. The supplier knows also that they can transfer the techniques, tools and philosophies to other lines that satisfy their other customers. This reduces the overheads absorbed by the company and increases their competitive advantage. Newlands discusses the process of supplier development in Chapter 28 in this volume. Closing the Deal Before sitting down at the negotiation table, the parties should determine what is needed to tie down the deal. In many western societies (e.g., USA, Western Europe, Australia), the end result of negotiation will be a binding contract. While contracts may be obtained in other parts of the world, negotiators will also want to take special care to develop meaningful contacts. Put differently, when doing business internationally, negotiators are best served by seeking to develop relationships – not simply ‘doing a deal’ (Griffin and Daggatt 1990). In addition to this helpful general advice, there are a number of key questions that should be answered before negotiators conclude discussions. Among these questions are the following: 1. What are the final terms agreed upon: a) price and cost structure; b) goods or services to be provided; c) timing of delivery or service; d) payment terms (e.g., date due, interest charges); e) other material components of the transaction (e.g., service to provided with equipment purchased, options for future purchases); f) ownership of any copyrights, patents or other limitations on usage? 2. If there is a dispute, how will it be resolved (e.g., further discussion, courts, mediation, arbitration)? 3. Can the outcome of the negotiation be discussed publicly (e.g., press release announcing new joint venture)? Measuring the Utility The final aspect of negotiation preparation is to determine how you will measure the value of the deal. Untrained negotiators tend to focus on one simple factor that is used to define success or failure: price. However, as you have learned in this chapter, there is much more to negotiation than price. The skilled negotiator will review the various interests in the case and place a value on each. Especially when negotiating deals across cultural boundaries, he must find a way to measure the quality of the terms of the deal as well as the foundation of trust

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or relationship that is developed. Future deals will depend as much or more on the latter as they do the former. Another reason to prepare to quantify the quality of the deal is so that it can be explained to other parties with a stake in the outcome but who were not part of the process (e.g., one’s boss or peer). Finally, knowing clearly what you want and how success will be measured and obtained will help a negotiator resist the other party’s attempts to assign the value in any given proposal.

Enacting an Integrative Negotiation Strategy Let us not be blind to our differences – but let us also direct attention to our common interests and the means by which those differences can be resolved. John F. Kennedy

The quote by US President John F. Kennedy revolves around differences of preference and opinion that exist between two parties. He insightfully directs attention to the importance of understanding our common interests and commitment to a process that leads to beneficial outcomes for each side. The fundamental structure of an integrative negotiation situation is such that it allows both sides to reach its objectives. Following is a discussion of the key processes involved in crafting integrative agreements. Create a Free Flow of Information Effective information exchange promotes the development of good integrative solutions. For the exchange to occur, the negotiators must be willing to reveal their true objectives and to listen to each other carefully. Willingness to share information is not a characteristic of distributive bargaining situations, in which the parties distrust one another, conceal and manipulate information, and attempt to learn about the other for their own competitive advantage. Attempt to Understand the Other Negotiator’s Real Needs and Objectives To help satisfy another’s needs, first one must understand them. Integrative agreements are most likely when the parties exchange information about their priorities for certain issues. Emphasize Commonalities between the Parties and Minimize the Differences Many times a new frame of reference is needed for the parties to share information and understand others’ needs. Individual goals may need to be redefined as best achievable through collaborative efforts directed toward a collective goal. Search for Solutions that meet the Goals and Objectives of Both Sides In the process of developing solutions that meet the objectives and needs of all parties, negotiators need to be both firm (around their primary interests) and flexible (around the manner in which these interests are met). Successful integrative negotiation requires each negotiator to define and pursue his own goals and be mindful of the other’s goals and search for solutions that meet the needs of both sides. Outcomes are measured by the degree to which they meet both negotiators’ goals – not by determining whether one party is doing better than the other.

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Introduce Other Issues and Explore Differences in Preferences across the Issues Most negotiation situations present themselves as single-issue negotiations. By definition, single-issue negotiations are not win-win because whatever one party gains, the other loses. In even the simplest negotiations it is possible to identify more than one issue. Similarly, it can be valuable to bring other issues into the negotiation or make side deals. While many people feel threatened by differences, diversity can be valuable in crafting integrative deals – especially when the negotiators are able to determine the other party’s preferences and devise a means of satisfying each party’s most important interests while inducing them to make concessions on lower-priority issues. Asking diagnostic questions, providing information, making package deals rather than single-issue offers and using contingent contracts (based on differences in valuation, expectations, risk attitudes or time preferences) are additional tactics that facilitate integrative settlements.

Enacting a Distributive Negotiation Strategy Effectiveness at the conference table depends upon overstating one’s demands. Henry Kissinger (US Secretary of State, 1973 Noble Prize Winner)

The prime objective in distributive bargaining is to maximize the value of this single deal (Thompson 2004). The following are tactics designed to increase the probability that a negotiator will ‘win’ the negotiation or obtain the most favourable possible slice of the pie. Know your BATNA Before entering the negotiation, be clear about your alternatives. Then seek to improve those alternatives. Also, exercise caution not to disclose those alternatives – unless one is willing to accept terms identical to the best alternative. Further, do not lie about your BATNA. Not only does it raise ethical concerns but lying also reduces the size of the bargaining zone – which cause the negotiation to end in impasse when it otherwise would have been beneficial to both sides. Research the Other Party’s BATNA Whilst this may prove difficult, clearly it will define the bargaining zone as well as provide insight into the lowest possible offer they should be willing to accept. There are a variety of ways of anticipating or learning about an opponent’s alternatives including public information sources (e.g., newspapers, trade journals), the internet, competitors, suppliers, and customers. Set High Aspirations Aspirations or targets have been demonstrated to influence final demands more than BATNAs. Negotiators who set higher targets tend to get more of the opportunities than those who set low targets. High goals also help negotiators to avoid the ‘winner’s curse’ that occurs when your first offer is immediately accepted by the other side because it is too generous.

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Make the First Offer As discussed previously, making the first offer confers an advantage by setting the anchor. Research shows that first offers correlate with final outcomes at least .85 – suggesting they are very important. Also, it is important to wait for a counter-offer before reducing stated expectations. In certain situations patience and silence can be important negotiation tools (as they were in our opening example). Counter-offer Immediately Making a counter-offer immediately has the effect of diminishing the prominence of the opponent’s offer. Avoid Stating Ranges Stating a range gives up valuable bargaining ground. Opponents will consider the lower end of the range as your target and negotiate down from there. A better response if asked to provide a range is to give a number of offers that would be equally satisfying to you. Make Bilateral Concessions It is an almost universal norm that concessions take place in a back-and-forth exchange. Do not offer more than one at a time. Wait for the other party to concede before going further. Appeal to Norms of Fairness Fairness is a key issue in negotiation as most negotiators view themselves as fair. It is critical, however, to determine which norms of fairness would be appropriate to the situations (e.g., equality, equity, needs based). The following example of the needs-based standard for fairness that exists in Vietnam has important implications for business. Needs Based Fairness Rules An Executive MBA group was assigned to study the viability of ‘self-drive car rental’ in Vietnam. Currently nearly all rentals in Vietnam employ the ‘car and driver’ model. In the course of the study, the students learned that in Vietnam, when two parties are involved in an accident, it is the party that is perceived to be the most affluent who must take financial responsibility for damages. In the case of a foreigner being involved in an accident with a local resident, it is always the foreigner who is perceived to be the wealthier party, and thus the foreigner is always responsible financially. While there were other factors considered before recommending against the self-drive car rental model, this issue was the largest obstacle. The concern was validated when the students visited Vietnam and met with expatriate American business managers. They indicated that they would never drive a car there under any circumstances and this was one of the main reasons.

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Critical Considerations When Negotiating Internationally When negotiators work across borders, they are likely to also confront differences in culture. As discussed in earlier chapters, culture is the unique character of a social group. Cultures consist of psychological elements, the values and norms shared by members of a group as well as social structural elements like the economic, social, political, and religious institutions that are the context for social interaction. Cultural values point to what issues are more or less important (as can be seen in the story below about the Mexican fisherman) and influence a negotiator’s interests and priorities. Cultural norms define what behaviours are appropriate and inappropriate in negotiation and influence negotiators’ strategies. Mexican Fisherman An American investment banker was at the pier of a small coastal Mexican village when a small boat with just one fisherman docked. Inside the small boat were several large yellow fin tuna. The American complimented the Mexican on the quality of his fish and asked how long it took to catch them. The Mexican replied, ‘Only a little while.’ The American then asked, ‘Why didn’t you stay out longer and catch more fish?’ The Mexican said, ‘With this I have more than enough to support my family’s needs.’ The American then asked, ‘But what do you do with the rest of your time?’ The Mexican fisherman said, ‘I sleep late, fish a little, play with my children, take siesta with my wife, Maria, stroll into the village each evening where I sip wine and play guitar with my amigos, I have a full and busy life.’ The American responded, ‘I am a Georgetown MBA and could help you. You should spend more time fishing; and with the proceeds, buy a bigger boat. With the proceeds from the bigger boat you could buy several boats. Eventually you would have a fleet of fishing boats. Instead of selling your catch to a middleman you would sell directly to the processor; eventually you will open your own cannery. You would control the product, processing and distribution. You would need to leave this small coastal fishing village and move to Mexico City, then Los Angeles and eventually New York where you will run your ever-expanding enterprise.’ The Mexican fisherman asked, ‘But, how long will this all take?’ To which the American replied, ‘15 to 20 years.’ ‘But what then?’ asked the Mexican. The American laughed and said ‘That’s the best part. When the time is right you would announce an IPO and sell your company stock to the public and become very rich, you would make millions.’ ‘Millions? Then what?’ The American said, ‘Then you would retire. Move to a small coastal fishing village where you would sleep late, fish a little, play with your kids, take siesta with your wife, stroll to the village in the evenings where you could sip wine and play your guitar with your amigos.’ Author unknown

Cultural values may reveal the interests underlying negotiators’ requests. Negotiators who value tradition over change may be less enthusiastic about economic development that threatens valued ways of life than negotiators from cultures that value change and development. This

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was the case with Disney when it tried to buy a large tract of land south of Paris to construct EuroDisney. When people negotiate, their behaviours are strategic and their strategies may be culturally based. This is the case because cultures develop norms to facilitate social interaction. Norms function because they reduce the number of choices a person has to make about how to behave and because they provide expectations about how others in the culture will behave. For example, in some cultures negotiations are not direct verbal interactions. Sometimes the verbal message is indirect because disagreement or confrontation would be rude and result in loss of face (e.g., in China) (Wilhelm 1994). Other alternatives include communicating through nonverbal behaviour or a third party. Other norms have evolved over what constitutes a ‘reasonable’ opening offer. In some cultures, negotiators make ‘extreme’ opening offers with the expectation that they will later make large concessions to signal their good faith in bargaining. However, other cultures encourage opening offers that are very near expected settlement points in a sign of their interest in saving time and energy. Sometimes this is called ‘getting straight to the point’. In either case, it is important to anticipate the ranges created by opening offers by studying the prevailing cultural norms across countries. Another instance where culture influences negotiators is motivation. Negotiators from countries characterized as individualistic may be most concerned about their own interests or those of their immediate group. In contrast, negotiators from countries characterized as collectivistic may be more concerned about collective interests that extend beyond the parties at the negotiation table. Negotiators who work across national and cultural boundaries will need to be sensitive to these differences in motivations among potential partners so as to be able to clearly identify and prioritize all of the potential interests to be addressed in the negotiation. Cultures are distinguished by the difference observed between their hierarchical or egalitarian tendencies. In hierarchical cultures, social status implies social power. Social inferiors are expected to defer to social superiors. Thus, in hierarchical cultures, people may be reluctant to confront another directly because it implies a lack of respect. In contrast, in more egalitarian cultures, BATNA may very well be the key source of power. Because neither party is assumed to be superior, the quality of a person’s alternatives will dictate how dependent or beholden he is to the other party. In short, the flexible nature of BATNAs fits well with egalitarian cultures whereas status-based power tends to dominate in hierarchical cultures. People in low-context cultures (e.g., Germany, Scandinavian countries, United States) tend to communicate directly. Information is explicit, without nuance, and relatively context free. Put differently, the meaning is on the surface of the message. In contrast, people in high-context cultures (Arab cultures, France, Japan, and Russia) tend to communicate indirectly. Meaning is rooted in the context of the message and must be inferred to be understood. Many times, high-context cultures are characterized by extensive information networks among friends, family, colleagues, and clients. Important information oftentimes comes through an informal channel to complement information that comes through more formal channels. Thus, when people outside the network enter into negotiations in high-context cultures, time spend building a relationship is especially valuable. A recent conversation with a wise Brazilian businessman sheds light in the importance of making personal connections. When asked why negotiations move so slowly in the early stages in South America, he answered, ‘We don’t negotiate with strangers. Until we know the person, it is pointless to discuss matters of substance’. This is because the population understand that three types of agreements are required. Recognition agreements are concerned with who can participate. Does each party recognize the right and authority of the other to participate in the negotiation. A second level relates to agreements on the process – arbitration for example. The third level of agreement relates to the substantive

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negotiation concerning what they want out of the deal – lower price, more profit, faster, higher quality etc. Language barriers also can complicate negotiations. Sometimes it is the inability of a negotiator to clearly express him or herself that causes problems. Other times overconfidence that the message truly has been understood and agreed upon that undermines the negotiation (as can be seen in the example below about Nissan). One way negotiators seek to overcome language issues is to involve professional translators. However, introducing translators to the equation adds complexity and some potentially unintended consequences. One risk when using a translator is that he or she may be more loyal to their countrymen than to the foreigner they are to serve. This points to the critical role of trust in negotiation. As another example, though many Asians will understand English very well, to avoid losing face by making a mistake they will employ a translator. Because they understand the English when first spoken by their counterparts, these negotiators will have a time-based advantage because they can think about the implications of the communication while the translator is taking time to translate. In the ‘negotiation dance’ this may be very helpful in buying time to formulate superior responses or counter-offers. Nissan When a person learns Japanese, she will come across some basic Japanese vocabulary words that sound like words in English. Hai is one example. It does not mean ‘hi!’ In fact, it means ‘yes’, and it is equivalent to an American saying ‘hmm’ or ‘I see’ in a conversational setting – a verbal cue to let the speaker know that the listener is following what is being said. (It is important to understand that hai does not necessarily mean that the listener agrees with the speaker!) Consider the exchange below that might have taken place when Carlos Ghosn was leading a major turnaround effort at Nissan in Japan (Magee 2003). Imagine the outcome might have been different if he believed that his Japanese partner was saying ‘Yes, I agree’ versus ‘Yes, I see.’ Ghosn: We need to radically change. Partner: Yes. Ghosn: We need to cut jobs. Partner: Yes. Ghosn: We need to do it quickly. Partner: Yes.

Perspectives on time also influence the behaviours of negotiators from different cultures. In some cultures, time is seen as being a limited resource which is constantly being used up. It is like having a sink full of water which can never be replaced, and which is running down the drain. You have to use it as it runs down the drain or it is wasted. In other cultures, time is perceived to be more plentiful. In societies where time is limited, punctuality becomes a virtue. It is insulting to waste someone’s time. In the United States you frequently hear people say, ‘Time is money.’ In cultures where time is plentiful, like India or Latin American, there is no problem with making people wait all day and then telling them to come back the next day. Time-plentiful cultures tend to rely on trust to do business. Time-limited cultures often do not have time to develop trust and so create other mechanisms to replace trust (such as strong legal protections).

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The particularly American desire for expeditious entry into the heart of the matter was exhibited by Franklin Roosevelt at the end of World War II at the famous Yalta conference. Before the meeting, Roosevelt and Churchill met to discuss strategy. Roosevelt expressed his hope that the meetings with Stalin would not last more than five or six days. Churchill replied: ‘I do not see any way of realizing our hopes about world organization in five or six days. Even the Almighty took seven.’ The extent to which American expectations of the duration of a negotiation can differ from those of a foreign foe was demonstrated yet again when peace talks to end the Vietnam War began in Paris. The American negotiators, led by Averell Harriman, checked into the Ritz Hotel, while the North Vietnamese leased a villa for two years.

Conclusions In this chapter, we have explored the key points for successfully preparing to negotiate across cultures. As should be evident by now, the most successful negotiators internationally are not those schooled in the art of advanced table pounding or making loud threats. Instead those who are willing to invest time and energy to prepare thoroughly are more likely to succeed. Excellent cross-cultural negotiators will proceed slowly in negotiations, testing their assumptions about what strategy and tactics will be effective with the other party (Brett 2001). They are willing to adjust their use of negotiation strategy to achieve their goals but do not compromise on their goals.

References Brett, J.M. (2001), Negotiating Globally (San Francisco, CA: Jossey-Bass). Fisher, R., Ury, W. and Patton, B. (1991), Getting to Yes: Negotiating Agreement without Giving In (New York: Penguin Books). Griffin, T.J. and Daggatt, W.R. (1990), The Global Negotiator (New York: Harper Business). Lewicki, R.J., Saunders, D.M. and Barry, B. (2005), Negotiation (New York: McGraw-Hill Irwin). Lewicki, R.J., Barry, B., Saunders, D.M. and Minton, J.W. (2004), Essentials of Negotiation (New York: McGraw-Hill Irwin). Magee, D. (2003), Turnaround: How Carlos Ghosn Rescued Nissan (New York: HarperCollins). Pruitt, D.G. and Rubin, J.Z. (1986), Social Conflict: Escalation, Stalemate and Settlement (New York: Random House). Raiffa, H. (2000), The Art and Science of Negotiation (Cambridge, MA: Harvard University Press). Thompson, L.L. (2004), The Mind and Heart of the Negotiator (Upper Saddle River, NJ: Prentice Hall). Wilhelm, A.D. (1994), The Chinese at the Negotiating Table (Washington, DC: National Defense University Press).

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Chapter 6

Social and Environmental Management Mark J. Hooper with Alkiviadis Tromaras

The world we have made, as a result of the level of thinking we have done thus far, creates problems we cannot solve at the same level of thinking at which we created them. Albert Einstein

Humanity, as a species, has developed a unique ability to shape whole environments for its benefit. Simultaneously, humanity is has endangered its current success as a result of activities to dispose of its waste by dumping materials. This chapter brings together arguments and evidence of the negative environmental impact. The aim of this chapter is to give a brief overview of the range of issues that challenge companies and organizations in the field of environmental management.

Introduction Four distinct phases of environmental development can be seen. The first encompasses the pre-industrial era. This period had the following characteristics: • artisanship-based production systems production; • agrarian-based economies; • limited division of labour – in pre-industrial societies, production was relatively simple and thus the number of specialized crafts was limited; • limited variation of social classes; • parochialism – communications were limited between communities. Few had a chance to see or hear beyond their own village. During this phase limited local, national and international development occurred. Humanity lived within the natural limits of the environment. The transition to the second phase resulted from the developments instigated by the Industrial Revolution. The catalyst for this change was the availability of information and knowledge. Once the domain of the skilled worker, this knowledge could now be transferred from the individual to the mechanism of machines. Skilled craftsmen were usurped by unskilled labour, allowing a wider pattern of economic participation. Towns and cities developed to provide this labour, changing the nature of cultures and societies. The new cities not only provided the source for goods but created markets for the new mass produced products. The cycle of consumerism was now in operation. The advent of the Second Industrial Revolution (1871–1914) further developed humanity’s ability to produce. Technological and economic progress gained momentum with the development of steam-powered ships, railways, and later in the nineteenth century the internal combustion engine and electrical power generation. This increasing production, however, produced conditions that precipitated the Long Depression

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and international turmoil that encompassed the two World Wars. The environment played only a small part in these industrial developments. Diseases were conquered and nature suppressed. The environment was seen as a source of wealth that was available for exploitation and control. Its conservation was of secondary importance to the economic benefits that could be gained. The advent of the third phase is associated with the international focus on stability and an end to economic nationalism following World War II. To meet these demands, international mechanism were created to aid communication and trade. The United Nations developed a world form for debate between nation, and mechanisms for conflict resolution. The need for post-war Western economic order was resolved with the agreements made on monetary order and an open trade at the 1944 United Nations Monetary and Financial Conference (Bretton Woods Conference). The agreement allowed for the synthesis of a British desire for full employment and economic stability and the United States’ desire for free trade. In order to achieve these aims, two fundamental approaches where adopted; the notion of open markets and the joint management of the Western political-economic order. Countries would maintain their national interest, but trade blocks and economic spheres of influence would no longer be legitimate means of control. These two principles informed the design and operation of three international bodies, the International Monetary Fund (IMF), the World Bank and the General Agreement on Trades and Tariffs (GATT, later transformed into the World Trade Organization (WTO)). Through the action of these bodies economies prospered and entered a period described as the post-war economic boom. Production exploded in a wave of consumerism, with little regard for the environmental consequences. However, as scientific methods became more sophisticated a clearer picture of the harm that was resulting from meeting these demands became evident. The social changes that had started in the Industrial Revolution had produced ever more sophisticated populations with increased levels of education who had a wide engagement with the democratic and political process. These two factors started to create increasing pressure for action at a governmental and inter-governmental level. The age of environmental activism was born. In the late twentieth and early twenty-first centuries, progression towards a fourth phase is underway. As in phases 2 and 3, the focus is on economic growth as the paramount driver for organizations and economies. Consumerism is accelerating on a global scale with the advent of increasingly sophisticated products and services utilizing more and more intense methods of production. However, the environmental and social costs of this progress are being questioned and challenged. The central dichotomy that is facing societies today is how to maintain economic growth and progress whilst protecting and enhancing the environment. This contradiction goes to the very heart of modernity and questions the fundamental tenets of large-scale integration: • increased movement of goods, capital, people and information among formerly separate areas; • increased influence that reaches beyond local to global. • increased formalization of mobile elements, development of ‘channels’ on which those elements and influences travel and standardization of many aspects of the society in general that is conducive to the mobility. • increased specialization of different segments of society. These growing demands for conservation and sustainability have driven nations to deliver solutions using regulation and legislation. Companies have responded, evidenced by the substantial rise in corporate awareness of environmental and social issues (Morhardt et al.

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2002). Companies seek to adopt environmental management in order to show that their activities are legitimate and that they comply with all the environmental conventions (Bansal and Roth 2000; Sharma 2000) and also to show that they are aware of the societal norms that currently lean towards environmentalism (IPCC 1999, p. 343; Bansal and Roth 2000). Compliance to regulations, especially in cases where sanctions of non-compliance are invoked (King and Lenox 2000; Stafford 1996; Berman et al. 1999; Cormier and Magnan 1999; Henriques and Sadorsky 1999; Reinhart 1999; Reivera-Camino 2001; Waddock and Graves 2000) and cost reduction at the operational, tactical and strategic level have been the most significant drivers the companies (Decahnt et al. 1994; Ghobadian et al. 1995; Prinn et al. 1990; Shrivastana 1995; Hart 1995; Ghobanian et al. 1998); Dias-Sardhina and Reijinders 2001; Reivera-Camino 2001). Additional benefits can be found by a proactive approach to industry codes allowing flexibility to be designed into operations. Many companies have found that an advanced relationship with stakeholders can enhance a company’s image, gain new markets creating a significant comparative competitive advantage (Bansal and Roth 2000; Hart 1995; Reinhart 1999; Shrivastana 1995). The power of the environmental movement on businesses is illustrated by the case of TXU. TXU, which has its headquarters in Dallas, Texas, provides electricity and related services to more than 2.2 million electricity customers in the state. TXU Power has over 18,300 MW of generation in Texas, including 2,300 MW of nuclear and 5,800 MW of coal-fired generation capacity. In April TXU announced plans to build 11 coal-fired power plants in Texas. The group Environmental Defense, led by Fred Krupp, mobilized an intense grassroots campaign targeting TXU and the Governor of Texas, Rick Perry. Nearly 50,000 Environmental Defense members and activists took action, sending emails, attending public hearings across Texas and submitting public comments against the plants. More than 50 community and environmental groups signed letters urging TXU to change its course. They took out television, billboard and online advertisements. These efforts were designed to achieve three goals: 1. stop as many of the plants as possible; 2. prevent TXU from exporting its coal plant build-out to other states; and 3. send a national message to other utility companies that the TXU plan is one they should reject. In February 2007, private equity firms Kohlberg Kravis Roberts & Co (KKR), Texas Pacific Group and Goldman Sachs announced their intention to purchase TXU by way of leveraged buyout for $45 billion. A precondition of the sale was a requirement to negotiate and reach an agreement regarding the issues raised by Environmental Defense. As a result a new environmental strategy for TXU was agreed: • terminate plans for the construction of eight of 11 coal-fired power plants TXU had hoped to build; • abandon TXU’s plans to expand coal operations in other states; • TXU to endorse the US Climate Action Partnership (USCAP) platform, including the call for a mandatory federal cap on carbon emissions; and • reduce the TXU’s carbon dioxide emissions to 1990 levels by 2020. The case of TXU clearly indicates the future pressures that organizations will experience and the strategic barriers that will have to be overcome.

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Global Warming The main concern of climate change centres on the global warming effect. The predicted warming is called green house effect which can be directly associated with human industrial activities, particularly the burning of fossil fuels such as oil, coal and natural gas. The earth’s global average temperature during the last two centuries has risen by between 0.4–0.8ºC (Lomborg 2001). The primary cause is the release of large quantities of greenhouse gases in the atmosphere. The main gas of concern is carbon dioxide (CO2), a product of the burning of fossil fuels and non-renewable biomass. Carbon dioxide plays an important role within the atmosphere providing a means of transferring carbon within ecosystems, allowing photosynthesis to take place and even allowing humans to breathe. Concentrations of this gas have varied during the evolution of the earth. High concentrations were present during the Cretaceous Period, approximately 136 million years ago. Coral, sponges and other small sea creatures used the gas to build and reinforce their bodies or shells. When they died, they sank to the bottom of the sea, eventually being transformed into sedimentary rock. The micro shells of these ancient creatures can be found today in chalk cliffs that greet visitors to British shores in Dover, Cap Gris-Nez in northern France or the French champagne that is consumed around the world which relies on the soil conditions provided by this chalk. CO2 is not alone in creating a warming effect; methane (CH4), Nitrous Oxide (N2O), ozone and CFC gases all create, to a larger or smaller extent, the same result. Most of these gases exist naturally in the atmosphere and are responsible for making the planet habitable. Without greenhouse gases, the Earth would be approximately 33ºC colder (ibid.) and the diversity of life that exists today would not have developed. At the other extreme, large amounts of these gases tend to trap heat and increase the Earth’s temperature.

The Greenhouse Effect The greenhouse effect is a relatively simple and well understood natural phenomenon. It was originally described in 1827 by the physicist-mathematician Jean-Baptiste Fourier. The effect takes its name from the its resemblance to a garden greenhouse, where glass panels let in visible (short wave) radiation and impede the exit of long wave thermal radiation. This increases the indoor temperature. The Earth receives a relatively constant amount of energy in the form of ‘incoming’ radiation. Light consists of visible spectrum, ultra violet and infrared. Some of this energy is reflected directly back out to space by the atmosphere and the surface, but approximately 70 per cent is absorbed. This absorption raises the temperature of the Earth’s surface and consequently that of the atmosphere. The same amount of energy is emitted back into space as thermal or ‘outgoing’ radiation. This balance between incoming and outgoing energy is necessary to maintain average temperature levels of approximately 15ºC (Makhijiani and Gurney 1995). Concern about the greenhouse effect generally focuses on the increase in the concentration of greenhouse gases from anthropogenic processes. An increase in Earth’s average temperature will raise sea levels through melting of the polar ice and thermal expansion of the oceans thus having disastrous consequences for people living in low-lying countries or coastal regions. Were the rate of temperature increase to be rapid, organisms would not be able to adapt quickly enough, jeopardizing the survival of numerous species.

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Approximately 80 per cent of the extra CO2 originates from fuel combustion such as oil, coal and gas. The remaining 20 per cent is emitted from ‘slash and burn’ deforestation methods, natural forest fires, volcanic activity and other changes in the tropics. About 55 per cent of the CO2 is absorbed by the oceans, by northern hemisphere forest and more generally by plant growth. Overall, the concentration of CO2 has increased since pre-industrial revolution times by 33 per cent (Lomborg 2001). Figure 6.1 shows the increase in CO2 emissions from 1751 to 2003.

Figure 6.1

The increase in CO2 emissions from 1751 to 2003

Source: Marland et al. 2006.

Since 1751 approximately 305 billion tons of carbon have been released into the atmosphere from the consumption of fossil fuels and cement production. Half of these emissions have occurred since the mid 1970s. The 2003 global fossil-fuel CO2 emission estimate, 7303 million metric tons of carbon, represents an all-time high and a 4.5 per cent increase from 2002.

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Greenhouse gases affect global temperatures both directly and indirectly. Direct effects happen because the gas itself is a greenhouse gas and indirectly because the climate acts as a natural chemistry set. The atmospheric transformation processes that break the gases into less harmful compounds can produce other greenhouse gases. Although different scenarios have been published regarding global warming and temperature rises, it is difficult to make accurate predictions. Some scenarios are more dramatic; others are more optimistic. These perspectives stem from differences with respect to predicted CO2 levels, the level of sophistication of climate model being used together with variations in initial model variables. The Inter-governmental Panel on Climate Change (IPCC) prediction an increase of 1.5–4.5ºC in global temperature has remained constant since 1970 (IPCC 1990, p. 135; 2002, 2006, p. 43). No predictions over the last 25 years have suggested conditions will improve, rather they confirm an evermore pessimistic view of future temperature change.

The Ozone Hole The catalytic destruction of ozone from ozone depleting compounds (ODCs) in the stratosphere originally was theorized and proposed in 1974 by Mario Molina and Sherwood Rowland. The ozone hole above Antarctica was first confirmed in 1982 by the British Antarctic Survey Team and was brought to light in the British Science journal Nature in 1985. Since then, research on the principles of ozone depletion have made significant advances and helped to create a global environmental awareness and consensus for action. Within two years of its publication in Nature, the Montreal protocol in 1987 took steps to ban ODCs such as CFCs. Significance of Ozone Ozone, derived from the Greek ‘ozein’ (‘to smell’), is a natural gas in the earth’s atmosphere. It is considered to be a trace gas, naturally existing in extremely small amounts (approximately 0.000008 per cent). Ozone is a ‘Janus faced’ molecule. In the lower atmosphere it is a toxic oxidizing agent that causes lung irritation. In the upper atmosphere it is transformed into a guardian of life on the earth. Approximately 90 per cent of ozone lies within the stratosphere. Maximum ozone concentration occurs in the middle of the stratosphere in the so-called ozone layer. Sunlight consists of radiation of various wavelengths that can be harmful to humans, such as ultraviolet. As altitude increases so radiation levels rise. Oxygen and ozone help to absorb this ultraviolet radiation from passing through the atmosphere and preventing it from reaching the surface and causing damage. Homogeneous Ozone Depletion Human activities are causing an imbalance between natural production and destruction of stratospheric ozone. Nitrous oxide from increased fertilizer usage results in an estimated 0.28 percent increase in NO2 concentrations every year (Prinn et al. 1990). The production of foam and refrigerant coolant relied heavily on compounds that containing the ozone depleting chemicals chlorine (Cl2) and bromine (Br2). When emitted into the atmosphere, these compounds migrate from the troposphere through the tropopause and accumulate in the stratosphere. Here they are broken down by ultraviolet radiation. The reaction between chlorine and ozone is:

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Cl + O3 → ClO + O2 Cl O + O → Cl + O2 O3 + O + Cl → O2 + O2 + Cl

(Warneck 1988, pp. 125–30).

Bromine is emitted in smaller quantities since it is present in smaller concentrations in ODCs, however, it is more effective in depleting the ozone layer. The reaction between bromine and ozone is: Br + O3 → BrO + O2 BrO + O → Br + O2 O3 + O + Br → O2 + O2 + Cl

(ibid.).

It takes many years for the ODCs to reach the stratosphere and undergo destruction. Despite the abandonment of these materials by the older industrialized nations, this long life cycle allows the release of chlorine to continue for many decades. Another mechanism for ozone depletion involves hydrogen chloride (HCl). HCl is formed by reactions with methane, a gas created from sources varied sources such as decompositions of organic materials, natural gas emissions, cattle, coal mining and oil extraction and refining. The reaction between chlorine and methane is: CH4 + Cl → CH3 + HCl Stratospheric chlorine can be incorporated into other inactive forms in addition to HCl. The most important of these is chlorine nitrate (ClONO2) that can be formed by the reaction: ClO + NO2 + M → ClONO2 + M (Makhijiani and Gurney 1995, p. 15). Over half of the stratospheric chlorine is stored in these two forms – HCl and ClONO2. Unfortunately, stratospheric chlorine diffuses when it passes through the tropopause back to the troposphere, a process that takes about two to five years (WMO 1991, p. 8.41). Before removal, HCl and ClONO2 act as a catalyst that facilitates the release of reactive chlorine approximately 20–200 times through photo-dissociation or reaction with OH that further destroys ozone (Rowland 1990, p. 284). Heterogeneous Ozone Depletion Homogeneous infers all depleting compounds are gases. Heterogeneous depletion covers ODCs in dual or triple phases, that is, gas + ice, gas and liquid, liquid and ice, and gas, liquid and ice. These phenomena are more likely to occur in the polar regions and over middle latitudes. The seasonal thinning of ozone in the Antarctic polar stratosphere involves a more intensive process than homogeneous depletion. The theories suggest that the same total concentration of all chlorine containing compounds can deplete ozone considerably more under certain conditions like those that prevail in the Arctic during winter and summer. These conditions

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can make HCl and ClONO2 become very active Cl and ClO as they react to aerosol surfaces and therefore increase ozone depletion. Figure 6.2 shows the 2005 seasonal depletion and recovery cycle of the ozone layer over Antarctica. Readers should note the scale of the ozone hole and its proximity to Australia, South Africa, Chile and Argentina. Weather systems drive the boundary gaseous areas out and mix low ozone and high ozone concentrations. This makes it very important for humans to protect against high ultraviolet (UV) radiation. Australians are advised to ‘slip, slap, slop’. They should slip on a shirt, slap on a hat and slop on high UV factor sun cream. Effect of Ozone Depletion Depletion of the ozone layer, discussed in the previous sections, allows greater amounts of radiation to reach the Earth’s surface. But not all radiation has the same effect on living organisms. Partial exposure to UV radiation is necessary for the formation of Vitamin D in humans. There are three classes of UV radiation: UV-A (wavelength above 320 nanometres), UV-B (290–320nm) and UV-C (40–290nm). The latter two can be extremely harmful and cause severe biological injury. UV-B will be discussed further because, even if small amounts reach the surface, it causes skin aging, skin cancer and other illnesses (Makhijiani and Gurney 1995, p. 50). UV-B radiation  UV-B radiation is responsible for DNA damage. The extent to which this occurs depends on the duration of the exposure, tolerance of the exposed organism and the biological coping reactions that take place. The main effects on human are skin cancer, cataracts and immuno-suppresion. Cataracts and cataract-related blindness is related to longterm and cumulative exposure to UV-B. Acute exposure can cause photokeratitis or ‘snowblindness’ (Sliney 2001; Roberts 2001; Johnson 2004). Damaged skin becomes more susceptible to skin tumours as a result of widespread immunological defence reductions (Young 2006). In 1993, Bentham (1993) concurred that there is sufficient evidence that links UV-B to cutaneous malignant melanoma and non-melonoma skin cancers. The immuno-suppression from UV-B radiation may exacerbate infectious diseases. The magnitude of these effects depends on the ethnic racial skin colour and age. Air Pollution Of all the different types of pollution, air contaminants are the most significant. In a consolidation of 39 regional, state and local comparative risk analysis studies, air pollution invariably came out as the most important environmental concern for human health (Konisky 1999). One might assume this phenomenon is a comparatively recent and the result of Western countries use of fossil fuels. A background level of air contaminants has existed throughout traceable human history. However, since the Industrial Revolution, air pollution has increased dramatically. Air pollution from lead can be traced back 6,000 years to its peak during the Greek and Roman eras. Seneca in ancient Rome complained of ‘the stink, soot and heavy air’ in the city (Miller and Tyler 1998, p. 466). In 1285 King Edward I established the world’s first air pollution commission and 25 years later banned coal burning. However, this law was not enforced and subsequently was eliminated from the statutes (Brimblecombe 1987, p. 9). Throughout the eighteenth century the city of London had 40 per cent less sunshine than

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surrounding towns due to the pollution-laden ‘smelly fog’, a contraction of which gives us the term we use today, smog. A fog-bound London has become an iconic image for the city, frequently depicted in the novels of Conan Doyle, films and famously inspiring Monet’s 1903 composition, ‘Le Parlement Londres’. Even today, foreign visitors to London can be heard to comment on the lack of fog in the city. Despite these romantic images the reality of air pollution in London was grim. The Great Smog (Big Smoke) that befell London in December 1952 illustrates this reality. Early in December 1952, a cold fog descended upon London. Because of the cold, Londoners began to burn more coal than usual to heat their homes. At the time the UK economy was under great strain and required high value exports to provide valuable foreign currency to ease these pressures. High quality coal was diverted from domestic consumption to export markets, leaving only poorer low-quality high-sulphur coal available to heat homes. The resulting air pollution was trapped by the inversion layer formed by the dense mass of cold air. Concentrations of pollutants, coal smoke in particular, built up dramatically creating a thick chemical laden ‘fog,’ or smog, so thick that driving became difficult or impossible (Figure 6.2). Its density and opacity was such that it easily entered buildings, obscuring theatre and cinema performances to such an extent that they were disrupted or cancellation. In the weeks that followed, the statistics showed that the smog had killed 4,000 people; predominantly the very young or elderly, or those with pre-existing respiratory conditions. Deaths in the majority of cases were due to hypoxia (low blood oxygen levels) caused by respiratory tract infections that obstructed breathing. The lung infections were predominantly bronchopneumonia or acute purulent bronchitis superimposed upon chronic bronchitis. These shocking statistics led to a re-evaluation of air pollution and generated a political will within the UK to instigate new regulations restricting the use of dirty fuels in industry and banning black smoke. The principal air pollutants are (Lomborg 2001, p. 165): • • • • • •

particles (smoke and soot from industrial plants, diesel engines and volcanic ash); sulphur dioxide (SO2) that creates acid rain; ozone (O3); lead; nitrogen oxides (NO and NO2, NOx); carbon monoxide (CO).

The main sources of these pollutants are transportation (cars, trucks, and motorcycles), aviation and industry. Overall there are efforts to reduce emissions into the atmosphere through different regulations described in the later legal issues section of this chapter. Although there has been some progress in obtaining reductions, air pollutions and emissions remain a problem that has not been fully addressed. This lack of progress is illustrated by the work of Benjamin Chauveau. Chauveau carried out a series air pollution recordings on the top level of the Eiffel Tower in the 1890s. The findings published in his book, L’Electricité atmosphérique (1925), showed that in the period 1896 to 1898 the Parisian atmosphere contained on average between 30 and 90 micrograms of particulate (smoke, soot and ashes) per cubic metre of air, a figure that is roughly equivalent to that generated in Paris today (Harrison and Aplin 2003; Miserey 2003). This type of pollution can be seen in all major modern cities and has been cited as a key factor in the growing incidence of pulmonary disorders, particularly amongst children. If we consider

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the UK, 5.2m people are currently receiving treatment for asthma of which 1.1m are children. This translates into one person in every five UK households being affected by asthma. Figure 6.2 shows a picture taken from the Kowloon peninsula of Victoria harbor in Hong Kong. The contrast between the clear foreground and hazy background clearly illustrates the pollution present in the modern urban setting. The incomplete combustion of fossil fuels (such as diesel) and wood releases black carbon into the air. Though black carbon, most of which is soot, is an extremely small component of air pollution at land surface levels, the phenomenon has a significant heating effect on the atmosphere at altitudes above 2 km (6,562 feet). Also, it dims the surface of the ocean by absorbing solar radiation. Experiments in the Maldives (comparing the atmosphere over the northern and southern islands) in the 1990s showed that the effect of macroscopic pollutants in the atmosphere at that time (blown south from India) caused about a 10 per cent reduction in sunlight reaching the surface in the area under the pollution cloud – a much greater reduction than expected from the presence of the particles themselves (Srinivasan and Gadgil 2002). Prior to the research being undertaken, predictions were of a 0.5–1 per cent effect from particulate matter; the variation from prediction may be explained by cloud formation with the particles acting as the focus for droplet creation. Clouds are very effective at reflecting light back out into space. The rate of dimming varies around the world but is on average estimated at around 2–3 per cent per decade, with the possibility that the trend reversed in the early 1990s. It is

Figure 6.2

Air pollution in Hong Kong observed in February 2008

Source: Photograph by kind permission of Dr Mark Hooper.

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difficult to make a precise measurement, due to the difficulty in accurately calibrating the instruments used, and the problem of spatial coverage. Nonetheless, the effect is almost certainly present. The effect (2–3 per cent, as above) is due to changes within the Earth’s atmosphere; the value of the solar radiation at the top of the atmosphere has not changed by more than a fraction of this amount. The effect varies greatly over the planet, but estimates of the terrestrial surface average value are: • • • •

5.3 per cent (9 W/m²); over 1958–1985 (Stanhill and Moreshet 2004); 2 per cent/decade over 1964–1993 (Hilgen et al. 1998); 2.7 per cent/decade (total 20 W/m²); up to 2000 (Stanhill and Cohen 2001); 4 per cent over 1961–1990 (Liepert 2002).

The phenomenon underlying global dimming may also have regional effects. While most of the earth has warmed, the regions that are downwind from major sources of air pollution (specifically SO2 emissions) have generally cooled. This may explain the cooling of the eastern United States relative to the warming western part. Some climate scientists have theorized that aircraft contrails (vapour trails) are implicated in global dimming, but the constant flow of air traffic previously meant that this could not be tested. Figure 6.3 shows an image pair, acquired on 9 December 2003, by the Aqua and the Terra satellites, visualizing numerous aeroplane contrails crisscrossing the English Channel.

Figure 6.3

Aeroplane condensation trails across the English Channel

Source: Jacques Descloitres, MODIS Rapid Response Team, NASA/GSFC.

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The shutdown of civil air traffic during the three days following the 11 September 2001 attacks provided an opportunity to observe the climate of the United States in the absence of the effect of contrails. During this period, an increase in diurnal temperature variation of over 1°C was observed in some parts of the US, that is, aircraft contrails may have been raising nighttime temperatures and/or lowering daytime temperatures by much more than previously thought (Travis 2002). Airborne volcanic ash can reflect the sun’s rays back out into space and cool the planet. Dips in earth temperatures have been observed from large volcano eruptions such as Mount Agung in Bali that erupted in 1963, El Chichon (Mexico) 1983, Ruiz (Colombia) 1985 and Pinatubo (Philippines) 1991. But even for major eruptions, the ash clouds remain only for relatively short periods. Some scientists now consider that the effects of global dimming have masked the effect of global warming to some extent and that resolving global dimming may therefore lead to increases in predictions of future temperature rise. Global warming and global dimming are not mutually exclusive or contradictory. This point is supported by the work of Romanou et al. (2007) in showing that the apparently opposing forces of global warming and global dimming can occur at the same time. Global dimming interacts with global warming by blocking sunlight that would otherwise cause evaporation and the particulates bind to water droplets. This reduces the amount of water vapor in the atmosphere. Water vapour, being a greenhouse gas, is reduced decreasing the heating effect. In an opposite parallel process, global dimming is affected by evaporation and rain. Rain has the effect of clearing particulate pollution. Climatologists are stressing that the roots of both global dimming causing pollutants and global warming causing greenhouse gases have to be dealt with together and soon.

Acid Rain The term pluie acide was first used by the French chemist Ducros in 1845 (Wellburn 1994, p. 97). It was only later, in 1872, that Robert Angus Smith, the Chief Alkali Inspector of the UK, introduced the phrase ‘acid rain’ to described the acidic nature of rain falling around Manchester (Smith 1872). The term acid rain describes acid depositions in the atmosphere, which can occur in two ways: wet and dry (Figure 6.4). Wet deposition refers to acidic rain, fog and snow (Wellburn 1994). In fact all rain has been acidic so the term acid rain has been related to acid that is produced when NOx or SO2, produced by pollution, reacts with water creating sulphuric or nitric acid. Dry deposition refers to acidic gases and particles (ibid.). Acid in the atmosphere returns to soil through acid deposition. This process describes the acid gases and particles that return to earth with the aid of wind. Acid deposition can also occur through the washed out particles and gases on different surfaces. These acids would be added to the water from acid rain, making the impact more severe. Acid rain occurs when sulphur dioxide (SO2) and nitrogen oxides (NOx) react with water, oxygen and other chemicals in the atmosphere to form acidic compounds such as sulphuric or nitric acid. Sunlight can enhance the rate of reaction between these compounds. The main source of SO2 and NOx is fossil fuel combustion. The phenomenon of acid rain became noticeable in the 1960s when air pollution from British coal combustion brought acid rain to Sweden and Norway that affected their rivers and lakes. The main pollutant was identified as sulphur dioxide. A belt from Birmingham to

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Atmospheric Gaseous Pollution

Sources

Atmospheric Particulate Pollution

Pollution in Cloud Water and Precipitation VOC NOX

Volatile SO2 Organic Compounds (VOC)

NOX

Natural

Anthropogenic

Figure 6.4

Wet Deposition

Dry Deposition

Dry Deposition

Receptors

The cycle of acidic compounds and acid rain types

Source: US Environmental Protection Agency.

Bratislava was affected by acidification of soils and waters. Two factors drove this pollution: the concentration of heavy industry and vehicles in this region and the tall smokestacks constructed by industry in order to reduce local air pollution. Releasing gases further up into the atmosphere allowed them to migrate into other countries. This acidification of water affected Nordic forests, killing tree leaves and needles and leaving plants weak and vulnerable to disease. Native fish stocks in Finland’s many lakes died out because of the change in acidity. The power of this acidic pollution can be clearly seen in the damage it causes to buildings, dissolving limestone, sandstone, marble and granite to form gypsum, which then flakes off. The phenomenon of transboundary pollution occurs in any area where acidic emissions occur. It is particularly problematical in East Asia, where Japan and Taiwan are showered by acid rain from Korea, China, Philippines and Taiwan. In 1980, half of Canada’s SO2 came from US. Given the damaging nature of this pollution, considerable work has been done to reduce such pollution, focusing on flue gas desulphurization and low sulphur based fuels. Notable successes in reducing sulphur oxide emissions have taken place in Europe, with a decrease of 15 per cent taking place between 1980 and 1995 (Murley 1995, p. 387). Reductions have occurred in US Great Lakes and Ohio River regions emissions are down by one-third from those of the 1980s.

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Soil Pollution In the twentieth century, significant soil pollution has been created by the metallurgical industries that grew rapidly in Europe, Eastern North America, the ex-Soviet Union states and Japan. Major sources include the refining, smelting and mining of metals such as lead, cadmium, mercury and zinc. Although these metals are important for industry, they have proved to be dangerous toxins for humans. Some of these substances enter soil first as air pollutants or directly enter the top soil. After entry into the soil strata, contaminants either migrate into the water bed, entering the food chain, or enter directly into the food chain as a result of herbivorous animals’ consumption of arable products such as grass, hay and silage. Japan provides numerous examples of this type of pollution in particular copper contamination from smelting and mining operations occurring in several Japanese river basins during the early twentieth century. In the Jinzu river valley, clusters of bone disease cases occurred, later being diagnosed as cadmium poisoning. Aside from metals, other chemical pollutants can challenge the environment. It is estimated that 10 million chemical compounds have been produced since 1900. Between 1940 and 1982, synthetic chemical production volumes expanded more than 350 times (Makhijiani and Gurney 1995, p. 50). A large proportion of those, perhaps 50–70 per cent, ended up in landfills. Metallurgical, petroleum and pharmaceutical companies dumped wastes directly and untreated into pits that were not lined to prevent migration into the strata. Probably the most widely reported case of the chemical pollution took place in the Love Canal area located in Niagara Falls region of New York State. Starting in the early 1920s, Hooker Chemical, along with fellow chemical companies located along the Niagara River, used Love Canal to dispose of 21,800 tons of hazardous chemicals, including 130 tons of dioxins (Charlier 2000). In 1953 the waste was capped with soil and by the late 1950s around 100 homes and an elementary school had been built on the site. In the years that followed, residents of the Love Canal housing estate complained about strange odours coming from their basements, gardens and sometimes their sewers. In other cases liquids came out from the ground. Residents started to complain of respiratory conditions, skin irritation, miscarriages and birth defects. In 1978, 800 chemical compounds buried at the site were identified. Medical tests were performed on residents, most of which remain confidential. Birth rates declined and some children were malformed. In May 1981 President Carter declared Love Canal a national emergency and residents were relocated (Niagara Gazette, 23 May 1980). In other cases, the US and some European countries have exported hazardous waste. During the 1970s this exchange of hazardous waste became an international business. For example, Mexico and some West African countries accepted waste for US. In the same manner Morocco and West African countries took waste from Europe and Southeast Asian countries received materials from Japan (McNeil 2001, p. 29).

Water Pollution Approximately 71 per cent of the Earth’s surface is covered by sea water, while a further 0.5 per cent is covered by lakes. Half of these lakes are freshwater, while rivers constitute 0.26 per cent of the area (Shiklomanov 2000). This section focuses on the impact human activities have on ocean habitats, rivers and lakes and the environmental signs of human activities.

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Oil Pollution in the Seas and Oceans Oil slicks and dumping waste are an all too common phenomena along sea lanes. It was estimated that in 1985 approximately 60 per cent of the marine sources of oil pollution came from routine oil tanker transport operation, while 20 per cent came from oil spills from tankers or other ships. Only 15 per cent could be accounted for by seepage from natural oil deposits (NRC 1975, p. 82). Oil pollution from routine tanker transportation is due to the fact that ships use sea water as ballast to stabilize the vessel while they sail unloaded. When the tanker arrives at its destination it flushes away the water into the harbour. This discharge contains oil and potentially other trace elements from previous cargos. This has been a serious problem. International agreements have been signed to regulate discharges. New technologies were developed to treat pollutant residues differently and waste treatment facilities in ports have improved (International Maritime Organization, http://www.imo.org/). Since oil spills can occur from cracks in the bottom of the sea from natural oil reserves, it is presumed that oil exploration and extraction has reduced the magnitude of the phenomenon because it has relieved the pressure from these reservoirs (Goudie 1993). Today, major oil spills are exclusively the result of accidents (ITOPF 2000). The impact from oil spills directly effect animals that populate the polluted area. The human food chain is indirectly affected as a result of reduced fish stocks in the area. Birds and other sea-going mammals are affected and overall coastal life diminishes. One of the main catastrophes in recent history was the Gulf War in 1991. Some 6 to 8 million tons of oil were spilled into the Gulf (Dodson et al. 1994). These shallow waters made the impact more devastating because most of the fauna and flora in the sea were destroyed, leaving little food for creatures in the marine biosystem. Numerous incidents have occurred that underline these points, but the accident that befell the Exxon Valdez on 24 March 1989 exemplifies best the hazards that oil pollution can carry. Following its collision in Prince William Sound in Alaska, 266,000 barrels of oil were released (Lomborg 2001, p. 192). The cost in animal life was 2,800 sea otters, 250,000 sea birds, 250 bald eagles, 300 harbour seals and probably 22 killer whales (ibid.). The oil spill ruined 300 kilometres of coastline and light oil was found along 1,700 kilometres of coast line (ibid.). Studies in the area later showed that most species recovered to some extent and the ecosystem is well on its recovery. The long-term impacts on species may take decades to be fully mitigated (Knickerbocker 1991). A significant financial package was put together to support the restoration and clean up of the oil from the area. Exxon paid $3.5 billion in total as a result of the accident, of which $2.1 billion were spent on the clean up operation (Exxon Valdez Oil Spill Trustee Committee, http:// www.evostc.state.ak.us/). Oil is one of the pollutants that tend to be found in seas and oceans. Chemicals from factories and municipal waste, however, are dumped close to shore, typically in bays and estuaries. These will be reviewed in the next section. Pollution in Seas and Oceans Seas have been used as convenient locations for the disposal of municipal and industrial waste. Two significant drivers for this behaviour have been the low cost relative to other disposal paths and the absence of technology to treat waste biologically. This is especially true of cities that were situated near the sea. New York is a notable example, sending immense barges out to sea where they dumped untreated waste. Despite the convenience of this mode of disposal some of this waste washes back to shore or enters into food chains. These actions can have considerable effects on ecosystems and those who interact with them. This interaction is illustrated by

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the events that occurred in Minamata Bay in Japan. From 1932 Nippon Chisso produced acetaldehyde using mercury as a catalyst. Waste Mercury was dumped into the bay through the factory’s waste where bacteria converted it to the organic compound methyl mercury that is an organic compound, which eventually found its way up to the food chain. Fish started to die unexpectedly in the late 1940s. Domestic and wild cats of the area started to act strangely, as if drunk, started to vomit and eventually died. In 1956 children of the area began developing brain diseases and numerous cases of deformed babies. It was finally confirmed that the cause of the effects was mercury poisoning. After eliminating the source of pollution and many years of monitoring, the bay was declared mercury free in 1997 (McNeil 2001, pp. 138–9). Larger-scale effects can also be seen. In the last few centuries, humanity has done much to alter the Mediterranean. It was a superhighway of transport in ancient times, allowing for trade and cultural exchange between emergent peoples. Structures have been built all along the coastlines, exacerbating and rerouting natural erosion patterns. Many pollution-producing boats travel the sea that unbalances the natural chemical balance of the region. Beaches have been mismanaged, and the overuse of the sea’s natural and marine resources continues to be a problem. Fresh water inflows from rivers are insufficient to counteract the high evaporation rate. In the twentieth century the sea has become highly polluted to the point where serious health issues have been created. These changes are most clearly illustrated by the fate of the old harbours of Piraeus, Alexandria and Ostia. Once thriving hubs of commerce, they are now empty and abandoned, silted up with waste and garbage. The main pollutants included microbes, synthetic organic compounds such as DDT or PCBs, oil, litter, heavy metals and radionuclides. Cities such as Athens and Thessaloniki in Greece as late as 1990 did not have sewage treatment and waste was dumped untreated into the sea as biological effluent. The main problem area was concentrated in industrial basins such as Ebro, Rhone, Genoa and the northern Adriatic coast from the Po delta to Trieste. These were cities with heavy industry that released heavy metals such as mercury, arsenic and lead along with PCBs into the sea (ibid.). River Pollution Pollution in rivers is of major concern because they form the major source of water for drinking, agricultural irrigation, and everyday use for human activities. In order for water to be suitable for use there are some certain criteria. Water must not contain E-coli bacteria or any other water-borne enzymes and viruses. There is some correlation between the wealth of a country and how polluted its rivers are. This is due to the fact that poorer countries have not invested in the technologies required to treat waste and hence dump them untreated directly into rivers. This correlation is not always valid because wealthy countries still have some polluted rivers. El Griffo in Bilbao, the industrial city in the Basque region of Northern Iberia is a case in point. After a century of intense industrial activity the river, especially the final 25km, was ecologically dead with oxygen levels 20 per cent below the norm, being one of the most polluted rivers in the world. The Thames, which flows through London, used to be a toxic soup described as a dark, turgid slurry of industrial toxins and coal power station discharges that was ‘too thick to swim in and to thin to plough’. Today both rivers have undergone extensive cleanups resulting in each having extensive marine ecosystems, including species such as salmon, which have an ultra low tolerance to toxins. Another criterion for judging the quality of water is its oxygen content. In a dissolved form oxygen is vital for organisms living in rivers, including fish, crabs and zoo-plankton. Oxygen

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also affects water in terms of odour, clarity and taste. Again there is a correlation between the wealth of a country and oxygen levels present in rivers. Chemicals are another issue concerning river pollution. Fertilizers used in agriculture illustrate these concerns. A principle constituent of these products is Nitrogen which if allowed to accumulate in drinking water leads to health problems such as stomach cancer. Oxygen asphyxiation also can occur as a result of a high concentration of nitrates in the blood, which inhibits the absorption of oxygen. Nitrate can be dangerous, because bacteria can convert it into nitrite which oxidizes the blood’s haemoglobin, impeding the transport of oxygen (methemoglobinemia) (IRIS 1991). Due to these risks in 1980 the EU and the US set standards for levels of nitrates in water (EU 1980; IRIS 1991). These standards have been mainly set for more vulnerable members of society such as babies. This was due to cases of ‘blue baby’ syndrome which describes the reduction of oxygen in blood causing cyanosis (Lack 1999). Conclusion In this section of chapter, the impacts of anthropogenic actions on the environment have been discussed. The aim was to introduce the different types of pollution and these effect the environment and living organisms. Issues such as global warming, ozone depletion, acid rain and air, water and soil pollution were reviewed to present the effect of human actions on the environment. Due to this impact it was demonstrated that there is a growing concern and scepticism for the state of the environment. Despite our sophistication, human beings are still a single species living within a series of ecosystems linked at a global scale. If these systems are damaged or polluted we ourselves are affected. This section of the chapter has focused on the mechanism of pollution and key issues related to them. The remainder of this chapter will review the actions of regulatory bodies and governments and will consider what efforts have been made to reduce the impact on the environment discussed above.

Global Environmental Initiatives The last two decades have been marked by the efforts of the United Nations and European Union to produce legislation that would help the conservation of the environment at a global rather than local scale. Although the first steps towards a sustainable environment and future were done back in the 1970s, the efforts were only isolated in countries holding International meetings and mainly discussing environmental issues. The decade of 1980s marked a more serious and concerted approach to environmental stewardship. Events such as the discovery of the ozone zone hole over Antarctica, made people realize that if certain measures were not introduced, the Earth could become a much more hostile home. The United Nations Environment Programme (UNEP) and the United Nations Framework Convention on Climate Change (UNFCC) produced a series of protocols, which will be discussed later, such as the Montreal and Kyoto Protocols, which are considered to be the most significant. These can be seen as the most systematic efforts of world governments to create a sustainable future. Parallel to this endeavour the EU has created its own set of directives which attempt to minimize the anthropogenic impact on the environment and promote sustainability. This section of the chapter is dedicated to the most significant environmental Protocols and Directives.

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Vienna Convention In 1985 the United Nations Environmental Programme (UNEP) Governing Council set up a working group that would prepare the framework for a convention for the protection of the ozone layer. The main objective was to create a protocol that would give the basis for preventing ozone depletion. The negotiations of creating a treaty that would help to tackle the problem of ozone depletion proved to be a difficult task. Finally, 1985, the Protocol was signed in Vienna, by 20 nations but not many ratified it immediately. The protocol did not specify any ways of achieving any target, but mentioned ways of monitoring and doing scientific research on ozone depletion. This was the main target – to boost and promote research and cooperation between countries. Specifically, all the parties are asked to undertake, as appropriate, to initiate and cooperate in conducting research and scientific assessment on: • physical and chemical processes that may affect the ozone as a whole; • the human health and other biological effects that might derive from modification of ozone depletion and specifically from UV-B radiation; • climate changes due to ozone layer modification; • effects that derive from ozone depletion and UV-B radiation and have effect on natural and synthetic materials useful to humans; • substances, practices, processes and activities that can affect the ozone layer and their cumulative effects; • alternative substances and technologies; • related socio-economic matters. For the first time ozone depletion substances and their possible effects were discussed in the proceedings. These were substances such as carbon substances, CO2, CO, CH4, non-methane hydrocarbon species, Nitrogen substances, N2O, NOx, chlorine substances, fully halogenated alkanes, partially halogenated alkanes, bromine substances, hydrogen substances and H2O. Despite the endless disputes, the Vienna Convention provided the foundations for the Montreal Protocol in 1987. ‘For the first time nations agreed in principle to tackle a global environmental problem before its effects were felt or even scientifically proven’ (UNFCC 2002). Later on, in the journal Nature (Farman et al. 1985), Dr Joe Farman, a British scientist, would write about severe ozone depletion in the Antarctic and his findings would be confirmed by American satellite observations. This resulted in governments taking dramatic, transnational, measures in the form of the Montreal Protocol. For further details of the Vienna Protocol for the Protection of the Ozone Layer see UNEP 2001. Montreal Protocol The discovery of the ‘ozone hole’ and the first publication regarding its evidence in 1985 (Farman et al. 1985) triggered the current wave of environmental awareness. Ozone depletion was no longer a theory but a real phenomenon that could not be dismissed and which posed a significant threat to the environment. Within a year of the ozone hole’s discovery, the Vienna Convention for the Protection of the Ozone Layer took place, taking the first steps towards relating ozone depletion to human health. Stratospheric ozone depletion was recognized as a legitimate international environmental issue for further negotiation. Unfortunately, no protocol

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on controlling CFCs was established due to a dispute between USA, Canada, Sweden, Norway and Finland. Within the next two years, governments from all over the world were called to take drastic measures to control and minimize the effect of ozone depletion resulting from human activities. This showed a move against the toleration of the environmental pollution that had become suddenly so obvious. On 16 September 1987 the Montreal Protocol on Substance that Deplete the Ozone Layer was signed by 24 countries (United Nations Environment Programme (UNEP, http://www.unep.org/). The Protocol focused on compounds such as CFCs, halons, carbon tetrachloride, 1,1,1-trichlorofluorocarbons (methyl chloroform), hydrochlorofluorocarbons, hydrobromofluorocarbons, methyl bromide and bromochloromethane. These compounds would all have to be phased out by the 24 countries that had signed the treaty. On 1 January 1989 the protocol came into force (ibid.). All the parties agreed to freeze production and consumption of CFCs and halons along with the other compounds mentioned before, within seven months from the protocol’s entry into force. Different amendments were made during subsequent years in order to accelerate the phase out, namely in London 1990, Copenhagen 1992, Vienna 1995, Montreal 1997 and Beijing 1999 (UNEP 2000). Under the Copenhagen amendment, developed countries agreed to phase out CFCs by 1 January 1996, halons were to be totally phased out by 1 January 1994 and carbon tetrachloride and methyl chloroform by 1 January 1996. In consideration of the fact that application of these agreements might be constrained by factors such as social conditions and the level of infrastructure, developing countries were given dispensation to produce and purchase CFCS and carbon tetrachloride for use until 2010 and methyl chloroform until 2015–2016. Developing countries would also be allowed to produce up to 10 per cent of their calculated level of emissions in 1986 for domestic and essential use. Later amendments followed and focused on refining initially agreed values for the percentage reduction of substances towards their complete proscription (for further information on the Montreal Protocol, see UNEP 2000). Rio Declaration on Environment and Development The United Nations Conference on Environment and Development also known as the ‘Earth Summit’ took place in Rio de Janeiro between 3 and 14 June 1992. This was the largestever meeting of world’s leaders who came from 179 countries to discuss and take action on the environment. The Summit essentially reaffirmed the UNCED Declaration adopted at Stockholm on 16 June 1972 and sought to build on it (UNEP, http://www.unep.org/). Concern had been growing over the previous two decades about the huge discrepancy between developed and Third World nations. This inequality was seen as symptomatic of a degrading global relationship between environmental stakeholders which could not be sustained for the long term without radical realignment. This would influence the 1990s culture which made societies start to consider that, while societies must continued to develop and grow, the environment must be sustained. The challenge in this concept is how to make more people more aware of environmental issues and at the same time move towards sustainable forms of development and lifestyles. The goal of the Rio Declaration was to ‘establish a new equitable global partnership through the creation of new levels of cooperation among States, key sectors of societies and people’, in order to ‘work towards international agreements which respect the interests of all and protect the integrity of the global environmental and developmental system, recognizing the integral and interdependent nature of the Earth our home’ (UNEP 1992).

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The Declaration consisted of 27 anthropocentric principles. Specifically, it stipulated that people were entitled to health and productive life in harmony with nature (IISD, http://www. iisd.org/) and any further developments should not undermine the environment of future generations. All countries would have the right to exploit their resources without causing damage to the environment outside their borders and they should create international laws that should compensate those countries whose environment had been damaged because of their negligence. Moreover, in order to achieve sustainable development, environmental protection should be an integral part of the development process. This development process should be aiming for the eradication of poverty, since there can be no sustainable development while the rest of the world is living under the average standard of living. Therefore, public awareness of the environment was to be encouraged by government and people should put pressure on societies to pursue sustainable development. Hence, nations should create national laws that would protect the environment from pollution and the polluter should bear the cost of pollution. There should be cooperation between nations to create an open international economic system to support economic growth and sustainable development in all countries. These environmental policies should not create barriers to international trade and countries should exchange technological knowledge to achieve sustainability. Finally, war is destructive of sustainable development and all nations should respect international environmental laws. On the other hand peace, development and environmental protection are independent and indivisible (further information on the Earth Summit can be obtained from UNEP 1992). Kyoto Protocol Five years after the Rio de Janeiro Summit, the first legally binding treaty aimed at cutting emissions of the main greenhouse gas was signed in Kyoto, Japan on 11 December 1997. Building on the UN Framework of the Convention Climate Change, the Kyoto Protocol ‘broke new ground with its legally-binding constraints on greenhouse gas emissions and its innovative “mechanisms” aimed at cutting the cost of curbing emissions’ (UNFCC 2002). At the time of writing, 164 countries have ratified the protocol (UNFCC, http://www.unfcc.int/), more than any other environmental treaty, and it entered into force on 16 February 2005. The USA is not a signatory: although they signed the treaty on 12 November 1998 under the Clinton administration (Fletcher 2000), in 2001 the current Bush administration decided against ratification. The Kyoto Protocol commits all parties to individual, legal binding targets to limit or reduce their greenhouse gas emissions up to a total cut of at least 5 per cent from the 1990 baseline to 2008–2012. Each country has agreed a different target, while some of them have shown more initiative by agreeing a higher reduction of emissions. The greenhouse gases that the parties would have to reduce were carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs) and sulphur heaxafluoride (SF6). Emission targets must be met by the so-called commitment period of 2008–2012. However, progress must be made by 2005 and all countries must submit a progress report by the beginning of 2006. The Protocol does not oblige parties to follow specific strategies in achieving their emission targets but has set out a list of policies and measures that can help to mitigate climate change and promote sustainable development. These polices are:

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enhancing energy efficiency; protecting and enhancing greenhouse gas sinks; promote sustainable agriculture; promoting renewable energy, carbon sequestration and other environmentally-friendly technologies; removing subsidies and other market imperfections for environmentally-damaging activities; encouraging reforms in relevant sectors to promote emission reductions; tackling transport sector emissions; controlling methane emissions through recovery and use in waste management (UNFCC 2002).

Countries can reduce their emissions by increasing the removal of greenhouse gases by carbon sinks in the land use, land-use change and forestry (LULUCF) sector. The Protocol proposed the removal of emission through afforestation, reforestation and deforestation. In addition, three ‘innovative mechanisms’ were introduced: joint implementation, the clean development mechanism and emissions trading. All these methods can be used by member parties to reduce the cost of meeting their targets, in order to ease the economic cost of emissions’ removal by finding different means that would cost less but would have the same effect on the atmosphere. The mechanism of joint implementation allows member parties to implement projects that reduce emissions or increase removals by sinks, in the territories of other member parties, for example, by replacing a coal-fired power plant with a more efficient combined heat and power plant or reforesting land. These joint implementation plans are more likely to occur in economies in transition (EITs) such as the ex-Soviet Union countries. Emissions’ trading is a programme that allows member parties to buy emissions from another member, in order for the first to meet their targets. Emissions can be bought from countries that have less emissions and no heavy industries. By doing so, the party that buys the emissions are not reducing pollution but simply paying for the privilege to emit more. Clean development mechanism allows member countries to implement projects that can help reduce emissions in other countries. The reduction achieved by the project can contribute towards the member party meeting its target emissions. The Treaty was widely hailed as a major international success. It certainly can be described in such terms if one considers the difficult nature of gaining so many countries’ consent. However, the Treaty is limited in both its effect on global warming and the coverage it gives to carbon emission. Growing transportation sectors such as international aviation and marine bunker fuels used for international transport are not included in the Treaty and are reported separately from the overall emission total of the parties under the Convention (ibid.). The Protocol requires these countries to deal with International Civil Aviation Organization (ICAO) to control their emissions. Despite its ambition, the Treaty can only be seen as a first step in the confrontation of global warming. The Protocol does not consider emissions of oxides of nitrogen and water vapour which, at high altitude, can cause more damage to the atmosphere than carbon dioxide (Royal Commission on Environmental Pollution 2002). Despite these limitations the Kyoto protocol finally came into operation in 16 February 2005 (see UNFCC website, http://unfccc.int/ for further information on the Kyoto Protocol). The challenge for nations is to develop beyond the current protocol and take further steps towards the reduction of global warming gasses. The future direction of policy is illustrated

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by the non-binding G8+5 Climate Change Dialogue ‘Washington Declaration’ agreed on 16 February 2007. Presidents or Prime Ministers from Canada, France, Germany, Italy, Japan, Russia, United Kingdom, the United States, Brazil, China, India, Mexico and South Africa agreed in principle on the outline of a successor to the Kyoto Protocol. They envisage a global cap-and-trade system that would apply to both industrialized nations and developing countries and hope that this would be in place by 2009. WEEE and ROHS Directives The European Commission has prepared legislation to oblige manufacturers to pay for the treatment and recovery of white and brown waste from electrical and electronic equipment. The proposals are divided in two separate directives, one focussing on waste recovery and the other on hazardous substance restriction. Waste Electrical and Electronic Equipment (WEEE) (2002/96/EC) (EP/CEU 2003a) and Restriction of Hazardous Substances in Electrical and Electronic Equipment (ROHS) (2002/95/EC) (EP/CEU 2003b) are the EU directives that aim to minimize the impact of electrical and electronic goods on the environment, by increasing reuse and recycling, reducing the amount of WEEE going to landfill and reducing the quantities of four heavy metals and two brominated flame retardants which electronic equipment may contain. WEEE seeks to achieve this by making producers responsible for financing the collection, treatment and recovery of waste electrical equipment, and by obliging distributors to allow consumers to return their waste equipment free of charge. Some of the major issues in negotiation are when the Directive will come into action, the recovery process and financing. Under the ROHS directive all member states of the EU must have substituted the use of lead, mercury, hexavalent chromium, polybrominated bihenyls (PBB) and polybrominated diphenylethers (PBDEs) in electrical and electronic equipment that enters the market from 1 July 2006. Exemptions will be made if any of those are not scientifically or technically replaceable. The main aims of the directives are: • minimize waste from the end of electrical and electronic equipment’s life cycle in order to reduce land fill and the impact on the environment; • engage re-use, recycling and other forms of recovery of brown and white goods from electronic and electrical equipment that have come to the end of their life cycle; • minimize the risk and impact to the environment and human health of using hazardous substances in the production-manufacture, treatment and disposal. The Directives hold the manufacturers responsible for taking back and recovering electrical and electronic goods. This changes the relationship between customers and business from one based on a one-way transfer of goods to one where manufacturers take the responsibility for treating, recovering and disposing of the goods, which has to be free of charge for the customer and with the is possibility of collection from their household as well. Both directives became European Law on 13 August 2004. In order for the products to be suitable for collection and disposal in this way, they must be designed to be more environmentally friendly. The products would have to be recyclable, more durable and be able to be upgraded. Therefore they must have a longer life cycle. Currently the European Parliament is proposing a 60 to 80 per cent recycle ability depending on the product.

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The data shown in Table 6.1 are derived by the Industry Council for Electronic Equipment Recycling (ICEER) on the volumes on domestic WEEE in the UK. This table illustrates the significance of the directive when it comes into action for all the members of the EU. If all this volume of products could be recycled or re-used in different ways the impact on the environment could significantly be reduced (for further information on the directives see EP/CEU 2003a). EU Landfill Directive The EU Landfill Directive (1999/31/EC) (CEU 1999a) was adopted on 16 July 1999. The objective of the directive is to prevent or reduce the impact to the environment from waste of all type that come from anthropogenic activities. This would be achieved by strict regulations on materials that can be dumped and better and strict control of landfills, by setting standards in their design, operation and aftercare. The aim of the directive is to control the impact on the environment from landfill waste by preventing pollution that could affect the surface groundwater, soil, air and human health. All waste would have to be defined according to its type such as municipal, hazardous, non-hazardous and inert. This would apply to the landfills as well, which would be labelled depending on what type of waste they could accept. This means that no co-disposal of waste is allowed. The landfills can be characterized as: • landfills for hazardous waste; • landfills for non-hazardous waste; • landfills for inert waste. Table 6.1

Data from ICEER from 2005 in UK

Equipment

Tonnage discarded (’000tones)

Units discarded (millions)

Large household appliances

644

69%

14

16%

Small household appliances

80

8%

30

31%

IT/telecoms equipment

68

7%

21

23%

120

13%

12

13%

23

2%

5

5%

Toys, leisure and sports equipment

2